Strategic Audit Report Final

STRATEGIC AUDIT

SANDERSON FARMS, INC.

Prepared for:

MBA 690 – Strategic Management – Spring 2015

K. Michael Mathews, D.B.A

Associate Professor and Coordinator MBA Program

Huether School of Business

The College of Saint Rose, Albany, NY

Prepared by:

Ahmed Awan

Alamin Ahmed

Dinesh Kandasamy

Ella Niyokindi

STRATEGIC AUDIT: SANDERSON FARMS, INC.

TABLE OF CONTENTS

1. COMPANY PROFILE.....................................................................5

1.1. TIME LINE OF EVENTS.....................................................................................6

2. CURRENT SITUATION.................................................................8

2.1. CURRENT PERFORMANCE...............................................................................82.2. STRATEGIC POSTURE....................................................................................11

3. CORPORATE GOVERNANCE...................................................16

3.1. BOARD OF DIRECTORS..................................................................................163.2. TOP MANAGEMENT.......................................................................................23

4. EXTERNAL ENVIRONMENT....................................................24

4.1. NATURAL PHYSICAL ENVIRONMENT: SUSTAINABILITY ISSUES................244.2. SOCIETAL ENVIRONMENT............................................................................28

4.2.1. ECONOMIC...........................................................................................................284.2.2. TECHNOLOGICAL.................................................................................................304.2.3. POLITICAL-LEGAL...............................................................................................314.2.4. SOCIOCULTURAL..................................................................................................34

4.3. TASK ENVIRONMENT....................................................................................354.3.1. THREAT OF NEW ENTRANTS...............................................................................394.3.2. BARGAINING POWER OF BUYERS.......................................................................394.3.3. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES............................................414.3.4. BARGAINING POWER OF SUPPLIERS...................................................................414.3.5. RIVALRY AMONG COMPETING FIRMS................................................................424.3.6. RELATIVE POWER OF GOVERNMENT.................................................................434.3.7. FACTORS AFFECTING THE CORPORATION..........................................................44

4.4. EXTERNAL FACTOR ANALYSIS SUMMARY..................................................45

5. INTERNAL ENVIRONMENT.....................................................48

5.1. CORPORATE STRUCTURE.............................................................................485.2. CORPORATE CULTURE..................................................................................495.3. CORPORATE RESOURCES..............................................................................51

5.3.1. MARKETING.........................................................................................................515.3.2. FINANCE...............................................................................................................555.3.3. RESEARCH AND DEVELOPMENT.........................................................................60

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5.3.4. OPERATIONS.........................................................................................................605.3.5. INFORMATION TECHNOLOGY.............................................................................615.3.6. HUMAN RESOURCE MANAGEMENT....................................................................62

5.4. INTERNAL FACTOR ANALYSIS SUMMARY...................................................65

6. ANALYSIS OF STRATEGIC FACTORS (SWOT)...................67

6.1. SITUATIONAL ANALYSIS...............................................................................676.2. REVIEW OF STRATEGIC POSTURE...............................................................69

7. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGIES.......................................................................................70

7.1. STRATEGIC ALTERNATIVES..........................................................................717.1.1. SO STRATEGIES...................................................................................................727.1.2. WO STRATEGIES.................................................................................................747.1.3. ST STRATEGIES....................................................................................................767.1.4. WT STRATEGIES..................................................................................................77

7.2. OTHER STRATEGIES......................................................................................797.2.1. NO-CHANGE STRATEGY......................................................................................797.2.2. STRENGTHS-WEAKNESSES (SW) STRATEGY.....................................................79

7.3. CURRENT STRATEGIES..................................................................................797.3.1. ORGANIC GROWTH AND VERTICAL INTEGRATION...........................................807.3.2. DIFFERENTIATION................................................................................................807.3.3. CLEAN BALANCE SHEET.....................................................................................80

7.4. RECOMMENDED STRATEGIES.......................................................................817.4.1. SHORT–TERM STRATEGY: NO-CHANGE............................................................817.4.2. LONG–TERM STRATEGY: RELATED DIVERSIFICATION....................................82

8. IMPLEMENTATION, EVALUATION AND CONTROL........84

8.1. IMPLEMENTATION.........................................................................................848.1.1. WHO IMPLEMENTS STRATEGY?..........................................................................858.1.2. WHAT MUST BE DONE?........................................................................................868.1.3. HOW IS STRATEGY TO BE IMPLEMENTED?........................................................86

8.2. EVALUATION AND CONTROL........................................................................88

9. REFERENCES...............................................................................89

10. APPENDICES.................................................................................95

10.1. APPENDIX A: DUPONT TREES......................................................................9510.2. APPENDIX B: CONSOLIDATED STATEMENT OF CASH FLOWS.....................97

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1. COMPANY PROFILE

Sanderson Farms, Inc. was incorporated in Mississippi in 1955, and is a fully integrated

poultry processing company engaged in the production, processing, marketing and distribution of

fresh and frozen chicken products. In addition, the firm is engaged in the processing, marketing

and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc.

(Foods Division).

The firm sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and

boneless form, primarily under the Sanderson Farms® brand name to retailers, distributors, and

casual dining operators principally in the southeastern, southwestern, northeastern and western

United States, and to customers who resell frozen chicken into export markets.

In 1947, D.R. Sanderson and his two sons started a small-town farm supply business that

sold feed, seed, fertilizer and other farm supplies to their local and surrounding communities.

Through the careful management and hard work of three generations, that same family-owned

feed and seed store has grown to become the third largest poultry producer in the nation,

employing more than 11,000 employees in operations spanning five states and 13 cities.

Today, Sanderson Farms® is one of the nation’s leading food corporations, with annual

sales of more than $2.77 billion and a weekly processing capacity of 9.375 million chickens. By

relying on organic growth rather than acquisition, Sanderson Farms has positioned itself as a

leader in its industry and the only company to build new poultry complexes since 1997.

With its company headquarters in Laurel, Mississippi, Sanderson Farms is the only

Fortune 1000 company headquartered in the state of Mississippi. Utilizing the support of more

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than 800 independently contracted growers, 11 processing plants, nine hatcheries, eight feed

mills and one prepared foods division, the company supplies poultry products to food retailers,

distributors, restaurants and food service operators all across the United States and in more than

40 countries.

Responding to increased consumer demand for affordable, lean protein products,

Sanderson Farms’ newest poultry facility is a $140 million complex consisting of a feed mill,

hatchery, poultry processing plant and wastewater facility located in and near the city of

Palestine, Texas. At full capacity, the Palestine poultry giant is expected to process 1.25 million

chickens per week, increasing the company’s overall production by nearly 16 percent.

1.1. Time line of events

Since the company completed the initial public offering of its common stock in May

1987, the company has significantly expanded its operations to increase production capacity,

product lines and marketing flexibility. Through 1997, this expansion included the expansion of

the company’s Hammond, Louisiana processing facility; the construction of new wastewater

facilities at the Hammond, Louisiana and Collins and Hazlehurst, Mississippi processing

facilities; the addition of second shifts at the Hammond, Louisiana and the Laurel, Hazlehurst,

and Collins, Mississippi processing facilities; the expansion of freezer and production capacity at

its prepared chicken facility in Flowood, Mississippi; the expansion of freezer capacity at its

Hammond, Louisiana, and its Laurel and Collins, Mississippi processing facilities; the addition

of deboning capabilities at all of the company’s poultry processing facilities; the construction

and start-up of its McComb, Mississippi and Bryan, Texas production and processing facilities,

including a hatchery, a feed mill, a processing plant, and a wastewater treatment facility for each

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complex; and the expansion and renovation of the hatchery at its Hazlehurst, Mississippi

production facilities.

In the fourth quarter of fiscal 2005, the company began initial operations at a new

poultry-processing complex in southern Georgia. The complex consists of a feed mill, hatchery,

processing plant and wastewater treatment facility. This plant has the capacity to process

1.25 million head of chickens per week for the retail chill pack market.

On August 6, 2007, the company began initial operations at a new poultry-processing

complex in Waco and McLennan County, Texas. The complex consists of a hatchery, processing

plant and wastewater treatment facility. This complex shares a feed mill located in Robertson

County, Texas with our Bryan, Texas complex. The plant has the capacity to process

1.25 million head of chickens per week for the big bird deboning market.

In January 2011, the company began initial operations at a new poultry-processing

complex in Kinston, North Carolina. The complex consists of a hatchery, feed mill, processing

plant, and wastewater facility with the capacity to process 1.25 million chickens per week for the

retail chill pack market. The facility reached near full capacity during March 2012.

On February 14, 2013, the company announced the selection of sites in and near

Palestine, Texas, for the construction of its next poultry complex, and construction of the

complex began on or about October 1, 2013. The new complex will consist of a feed mill,

hatchery, processing plant and wastewater facility with the capacity to process 1.25 million

chickens per week for the big bird deboning market.

The company changed its marketing strategy in 1997 to move away from the small bird

markets serving primarily the fast food industry to concentrate its production in the retail and big

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bird deboning markets serving the retail grocery and food service industries. This market shift

resulted in larger average bird weights of the chickens processed by the company, and

substantially increased the number of pounds processed by the company. In addition, the

company continually evaluates internal and external expansion opportunities to continue its

growth in poultry and/or related food products. (Form 10-K, 2014)

2. CURRENT SITUATION

This section will discuss about the company's current performance in terms of stock

price, net profit margin, and return on equity, return on investment and return on assets. This

section will also discuss about the strategic posture of the company based on the vision, mission,

values statements and its objectives and policies.

2.1. Current Performance

Sanderson Farms has been doing reasonably well in terms of financial performance in the

year ended on October 31, 2014 and the first quarter ended on January 31, 2015 compared to the

previous period results.

The 15-Month Stock Price chart shows that the company's stock price steadily increased

from less than $75 per share to above $95 per share which is an increase of approximately 27%

in the first half of the year 2014. In the second half of 2014 the stock price declined due to

fluctuations in the overall market conditions. The downward trend continued till Jan 2015 and

during this period the price dropped to $80, which is a 17.5% drop from Jun 2014 level but still it

was higher than the price during Jan 2014. Overall the stock price grew by more than 7% in

2014.

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In the past one year the profitability of the firm has increased steadily. The below graph

shows the trailing twelve month (TTM) growth of return on equity (ROE), return on assets

(ROA), return on investment (ROI) and net profit margin (NPM) from February 2014 till

January 2015. There is an upward trend in all the profitability measures. The net profit margin

increased from 6.23% to 10.03%, the return on equity increased from 26.87% to 34.72%, the

return on assets increased from 18.25% to 27.35% and the return on investment increased from

23.26% to 33.66%.

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The 5-Year Stock Price chart shows a constant growth in stock price except for the year

2012 when there was a small decline. The prices declined during 2012 due to the increased feed

production costs. The prices of corn and soy, the primary sources of poultry feed, increased due

to the most extensive and severe drought in at least 25 years. The decline in the stock prices is

very minimal compared to the industry and the competitors due to its healthy balance sheet.

The 10-Year Stock Price chart also shows an upward trend in the movement of stock

prices.

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2.2. Strategic Posture

Sanderson Farm's corporate website clearly states the company's mission statement,

vision, values and commitment statements and they are as follows.

First its Mission is,

"Sanderson Farms, Inc. maximizes stockholder value by being a successful producer and

marketer of high quality food products and providing superior services to the food

industry."

The mission statement identifies that the company is in the business of producing and

marketing food and it operates in the scope of food industry. The reason for its existence is to

maximize shareholder value and the company tries to achieve its mission by being a successful

producer of high quality food products and also by providing superior services compared to its

competitors. Even though the company's business is concentrated in the poultry industry and

especially in the broiler industry the mission statement suggests that the company is identifying

itself with a much broader industry which gives the flexibility for future expansion and product

diversification and though the term being a 'successful producer' is vague, it can be interpreted as

being in the top 10% of the industry from the company's protein division manager jack Smith's

statement

"[Sanderson Farm] doesn’t try to the biggest, but we try to be the best. Our goal every

day is to be in the top 10% of our industry. When we come to work every day, if you ask

any of our employees they’ll tell you that. That’s what we do, and that’s what we’re

expected to do." (Roembke, 2010)

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Second its Vision is,

" Sanderson Farms is special. We are a successful, growing, publicly held company,

respected in the communities in which we live and the industries of which we are a part.

Our dedicated team of caring individuals treats all persons with absolute respect and

integrity. People in our organization are devoted to the success of their associates in

fulfilling their chosen potential in all aspects of life.

Our primary responsibility is to maximize shareholder value. Our hallmarks are quality

products, responsiveness to customer needs, superior achievement, prudent growth and

successful people."

The vision statement is a mix of mission and values. The company’s guiding principles

are derived from the corporate philosophy and the corporate vision statement (Sanderson Farms

News, 2012). Guiding principles are divided into the following five sections:

1. Successful people

2. Prudent growth

3. Superior achievement

4. Quality products and responsiveness to customer needs

5. Respected in the community and in the industry

Third its Commitment is,

" … As a company, Sanderson Farms is committed to adopting a fresh approach in

everything that it does. Not only where products are concerned, but companywide as

well. Though the company has grown in size, it still adheres to the same hometown values

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of honesty, integrity and innovation that were established when the Sanderson family

founded the company back in 1947 as a small feed, seed and farm supply business

….aligned with his family’s legacy of unparalleled growth, quality products and

responsiveness to customer needs."

The company stresses the importance of its family values through its commitments to

producing quality products and customer needs in order to achieve extraordinary growth.

Fourth its four Values are,

"100% NATURAL CHICKEN

At Sanderson Farms, we firmly stand behind our commitment to keep things the way

nature intended, meaning we don’t add anything to our fresh chicken. There are no

additives, artificial ingredients or preservatives. Some companies add a solution to their

fresh chicken products that can include water, salt, carrageenan (a seaweed extract),

broth or phosphates. Our chicken always consists of a single-ingredient product: 100%

natural chicken.

ANIMAL HEALTH

As a poultry processor, we are not only concerned about what is– or, in our case, is not–

added to our fresh protein products, we are also concerned about what kind of diet our

birds consume from the time that they hatch until they reach full maturity. By operating

our own feed mills, we maintain complete control over what our birds consume. We also

staff an in-house nutritionist who ensures our corn- and soy-based diets contain all the

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protein, energy, vitamins and mineral requirements necessary to grow healthy poultry –

without the addition of hormones or other potentially harmful compounds, of course.

ANIMAL WELFARE

To reinforce our commitment to natural ingredients and exceptional products, Sanderson

Farms remains actively involved in the preservation of our animals’ welfare and, as a

result, we exercise all measures to ensure that they are provided with the best possible

care. Our birds are raised in a climate-controlled environment and are free to roam

around the facility they are housed in, which allows them to be kept safe from outside

predators and potential diseases. Our corporate veterinary staff oversee the flocks on a

daily basis. For their own safety and well-being, the only time that our chickens are

caged is when they are transported from the farm to our processing facilities.

FOOD SAFETY

Sanderson Farms strives to be on the leading edge of quality control in our industry. As a

result, we often go beyond what is required by USDA standards to ensure that our

customers receive the highest quality products available, which is one of the principal

reasons why we insist on formulating our own feed and operating our own hatcheries.

We want to maintain as much of our product’s environment as humanly possible so that

we can safely assure our consumers that the items they purchase are wholesome,

delicious and, above all, safe."

The company also has a employee oriented vision for 2020 which is

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"… perpetuating the organization by filling the pipeline with high-performing people to

assure that every leadership level has an abundance of high performers to draw from,

both now and in the future."

Build and Grow & Product differentiation:

The company's strategic objective is differentiation. It uses quality as the main

differentiating factor and then customer service by marketing value added products. The

company is able to meet its mission of producing high quality 100% natural chicken by adopting

a build-and-grow strategy unlike the rest of the firms in the industry that grow by acquisition and

merger. The company has doubled the poultry production in the last ten years and tripled in last

20 years. The growth of the company is fully organic. As most of the other companies in the

industry Sanderson farms is also fully vertically integrated i.e, it controls the production of

hatching eggs, hatching, feed manufacturing, growing, processing, packaging and distribution of

its products. Sanderson Farms has built the last six plants that have been built in the country. The

company's highly customer focused approach is evident from the CEO's statement that if the

customers want the company to be run on Saturday then the company will run on Saturday. The

company markets processed and prepared chicken that adds value to the customer. The short-

term objective of the company might be to move away from the prepared chicken market

because it turns out to be not as profitable as the big bird deboning and tray markets. (WATT

poultry, 2014)

The company builds its plants mainly using the cash and capital from its operations and

tries to be free of debt to maintain a healthy balance sheet, which increases the shareholder value.

According to the CEO, Joe Sanderson, Jr. the company's balance sheet drives what the company

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does and so maintaining a clean sheet and managing what the company does will help the firm to

grow. This is the primary financial objective of the company.

3. CORPORATE GOVERNANCE

This section will analyze the effectiveness of corporate governance, which constitutes of

Board of Directors and the top management.

3.1. Board of Directors

Sanderson Farm’s board is composed of experienced members who have been with the

company for many years. Many of the members of the Board of Directors have been on the

board since the 1980s. Joe F. Sanderson, Jr., the CEO, has worked for Sanderson Farms since

1969 and he is the third generation of the Sanderson family. All of the members of the

management team bring years of industry experience.

Joe F. Sanderson, Jr. (Chairman of the Board and Chief Executive Officer)

Mr. Joe F. Sanderson is Chairman of the Board, Chief Executive Officer of Sanderson

Farms, Inc., Joe F. Sanderson, Jr. served as President of the Company from November 1, 1989 to

October 21, 2004, and has served as Chief Executive Officer since November 1, 1989 and as

Chairman of the Board of Directors since January 8, 1998. Mr. Sanderson continues to serve as

Chief Executive Officer and Chairman of the Board of Directors. Before his tenure as an

executive officer of the company he was continuously employed by Sanderson Farms in

numerous positions starting from 1969. Mr. Sanderson is a member of the Company’s Executive

Committee, which is a management committee, not a committee of directors. Mr. Sanderson’s

father, Joe Frank Sanderson, was one of the founders of the company.

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Lampkin Butts (Chief Operating officer, Director)

Mr. Lampkin Butts is President, Chief Operating Officer, and Director of Sanderson

Farms, Inc. Lampkin Butts served from 1996 to 2004 as Vice President-Sales for the Company.

On October 21, 2004, Mr. Butts was elected President and Chief Operating Officer of the

Company. He began his career with the Company in 1973. Mr. Butts is a member of the

Company’s Executive Committee, which is a management committee, not a committee of

directors.

Michael D. Cockrell (CFO, Treasurer and Director)

Mr. D. Michael Cockrell is Chief Financial Officer, Treasurer, Director of Sanderson

Farms, Inc., Mike Cockrell has served, since 1993, as Treasurer and Chief Financial Officer for

the Company. Before joining us, Mr. Cockrell was a shareholder and member of the law firm

Wise Carter Child & Caraway, Professional Association, of Jackson, Mississippi. He is also a

certified public accountant and was employed in the audit division of a public accounting firm

from 1979 to 1980. Mr. Cockrell is a member of the Company’s Executive Committee, which is

a management committee, not a committee of directors.

Phil K. Livingston (Independent Director)

Mr. Phil K. Livingston is Lead Independent Director of Sanderson Farms, Inc. Phil K.

Livingston served as President and Chief Executive Officer of Citizens National Bancshares, Inc.

in Hammond, Louisiana, from its organization in 1983, until its merger into Deposit Guaranty

Corporation on May 19, 1995. Mr. Livingston retired in 1998, but continued to serve as a

banking consultant to AmSouth Corporation following his retirement until 2001.

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John Bierbusse (Independent Director)

Mr. John Bierbusse is Director of Sanderson Farms, Inc., John Bierbusse was employed

by Duff and Phelps, Inc. from 1981 to 1987, and by A.G. Edwards from 1987 to 2004. Mr.

Bierbusse served as Assistant Manager, Securities Research between 1999 and 2002 at A.G.

Edwards, and as Manager, Research Administration from 2002 until his retirement in 2004. Mr.

Bierbusse served on the New York Stock Exchange’s Series 16 Test Committee from 2002 to

2007 and on the New York Stock Exchange’s Research Analyst Qualification Examination

Committee from 2003 to 2007. Mr. Bierbusse has been a Chartered Financial Analyst since

1987, and is currently retired.

John H. Baker (Independent Director)

Mr. John H. Baker is an Independent Director of Sanderson Farms, Inc. He has been the

sole proprietor of John H. Baker Interests, a real estate and development company in Houston,

Texas, since 1968.

Fred Banks (Independent Director)

Mr. Fred Banks is an Independent Director of Sanderson Farms, Inc. Fred Banks, Jr. has

been a partner in the General Litigation Group in the Jackson, Mississippi office of the law firm

of Phelps Dunbar LLP since 2001. Since 2008, he has been a non-equity senior partner with that

firm. From 1991 to 2001, he was a Justice of the Mississippi Supreme Court, and at the time of

his retirement from the court in 2001, he was serving as Presiding Justice. Before serving on the

Mississippi Supreme Court, Mr. Banks served as a Circuit Court Judge in Hinds and Yazoo

Counties, Mississippi for six years. From 1976 until 1985, he served in the Mississippi House of

Representatives.

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Toni D. Cooley (Independent Director)

Ms. Toni D. Cooley is an Independent Director of Sanderson Farms, Inc., Toni D. Cooley

founded and has been president of Systems Electro Coating, LLC, a tier one supplier to Nissan of

electro coated frames and other vehicle components, since 2001. She has also served as president

of Systems Consultants Associates, Inc., management training and consulting firm established

with the express purpose of assisting Jackson, Mississippi-based minority firms with capacity

building, since 1993. Ms. Cooley is also co-owner of Systems IT, Inc., in Jackson, Mississippi,

and is chief executive officer and president of Systems Automotive Interiors, L.L.C., a tier one

supplier of upholstered seats to Toyota Motor Manufacturing’s Mississippi plant, founded in

2011. From 1992 to 1993, Ms. Cooley worked as an International Contract Administrator for the

international sales team of the former Turner Broadcasting Systems. She is a director of

Trustmark National Bank and in 2013 was elected a director of Trustmark Corporation, which

has a class of securities registered with the Securities and Exchange Commission.

Beverly Wade Hogan (Independent Director)

Ms. Beverly Wade Hogan is an Independent Director of Sanderson Farms, Inc., Beverly

Wade Hogan has served, since May 2002, as President of Tougaloo College in Jackson,

Mississippi, a private, historically African-American, liberal arts college. Before becoming

President of Tougaloo College, Ms. Hogan served for one year as Interim President. Before that,

she served for ten years as a Commissioner for the Mississippi Workers Compensation

Commission.

Dr. Robert C. Khayat (Independent Director)

Dr. Robert C. Khayat is an Independent Director of Sanderson Farms, Inc., Robert C.

Khayat served as the Chancellor of the University of Mississippi from July 1995 until his

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retirement in July 2009. Before that, he served the university in various capacities, including as

professor of law at the University Of Mississippi School Of Law from 1982 to 1995. Mr. Khayat

served on the Board of Directors of Mississippi Power Company, a subsidiary of The Southern

Company, and Mississippi Valley Title Insurance Company, until his retirement from both

boards in 2009.

Dianne Mooney (Independent Director)

Ms. Dianne Mooney is an Independent Director of Sanderson Farms, Inc. Dianne

Mooney founded and served as Executive Director and Senior Vice President of Southern Living

at Home, a direct sales division of Southern Progress Corporation, from 1999 until her retirement

in 2007. Ms. Mooney was directly responsible for the launch and record growth of this $200

million division. Before that time, she was an employee of Southern Progress Corporation for

over thirty years in various positions, including Vice President of Business Development and

Vice President of Custom Publishing. Southern Progress Corporation is a division of Time, Inc.

Gail Jones Pittman (Independent Director)

Ms. Gail Jones Pittman is an Independent Director of Sanderson Farms, Inc. Gail Jones

Pittman has served, since its founding in 1979, as Chief Executive Officer of Gail Pittman, Inc.,

an entrepreneurial business creating individually hand-painted, semi-vitreous china dinnerware

and home accessories. It is located in Ridgeland, Mississippi.

Charles W. Ritter (Independent Director)

Mr. Charles W. Ritter is an Independent Director of Sanderson Farms, Inc., Charles W.

Ritter, Jr. served, from 1967 to 2002, as President and a Director of the Attala Company, which

is principally engaged in the business of milling and selling feed and corn meal. He now serves

as a management consultant to the Attala Company. He has also served as President of JRS, Inc.,

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a family owned real estate investment firm, since 1973. Mr. Ritter retired as a director of First M

& F Corp. and Merchants & Farmers Bank, Kosciusko, Mississippi, and chair of the audit

committee of First M & F Corp.’s Board of Directors in May 2011. First M & F Corp. has a class

of securities registered with the Securities and Exchange Commission.

The board members are from various walks of life and possess wide array of knowledge

and expertise from sales, finance, banking, law, education, communication, manufacturing,

investments, real estate, supply side of the industry etc., and this makes it a very diverse board.

Even the non-employee independent board members have substantial knowledge of the

company's business. Ten out of thirteen members of the board are independent members and

three are internal members, which is a good mix of internal and external members. According to

the Corporate Governance Principles (2014), the Board of Directors is elected by the

shareholders. The board has an emergency plan in the even of unavailability of CEO, COO and

CFO. Since, the CEO is also the Chairman of the board, it might raise the question of conflict of

interest but the board also elects a Lead independent director who presides over the executive

sessions of the independent Director's and other meetings of the board in the absence of

Chairman. The policy of the company is that the board consists of a majority of independent

Directors. The Board of Directors is actively involved in monitoring management activities and

setting high standards for the company’s employees, officers and directors. There are different

committees to monitor and perform different duties as mentioned below and these committees

are formed based on the guidelines prescribed by the NASDAQ Stock Market Rules, Section

10A(m)(3) of the Securities Exchange Act of 1934. All members and chairs of these committees

are only independent board members.

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Audit committee:

The board, from among its members, appoints the audit committee to oversee the

accounting and financial reporting processes of the company and the audits of the company’s

financial statements. In that regard, the audit committee assists the board in monitoring (1) the

integrity of the financial statements and internal controls of the company, (2) the independent

auditor’s qualifications and independence, (3) the performance of the company’s internal audit

function and independent auditors, and (4) the compliance by the company with legal and

regulatory requirements.

Compensation committee:

The compensation committee is appointed by the board to discharge the board’s

responsibilities relating to the compensation of the company’s Chief Executive Officer (the

“CEO”) and all of the company’s other executive officers (together with the CEO, the

“Executive Officers”). The committee also has overall responsibility for reviewing and

establishing all compensation plans, policies and programs of the company as they affect the

executive officers.

Nominating and governance committee:

The nominating and governance committee is appointed by the board (1) to assist the

board by identifying individuals qualified to become board members, and to recommend to the

board the director nominees for annual meetings of stockholders and any special meetings of

stockholders or meeting of directors at which directors are to be elected; (2) to recommend to the

board corporate governance principles and practices applicable to the company; (3) to lead the

board in its annual review of the board’s performance; (4) to recommend to the board director

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nominees for the board committees; and (5) to make recommendations to the board concerning

director compensation.

To fulfill the responsibilities and to discharge its duties, the Board of Directors follows

the procedures and standards that are set forth in the charters specific to each committee. Apart

from the charters all the executives and board members are guided by corporate code of conduct,

code of ethics, by-laws and corporate governance principles outlined in the respective documents

(Corporate governance, n.d.). All the board members are encouraged to own the company stocks

and many of them do.

3.2. Top Management

The top management of the company consists of four personal of which three are part of

the Board of Directors. They are Joe F. Sanderson, Jr., Chief Executive Officer, Michael D.

Cockrell, Chief Financial Officer, Lampkin Butts, Chief Operating Officer and Timothy F.

Rigney, Chief Accounting Officer and Secretary. All the executives have tenure of at least 20

years with the company. The top management has a lot of experience in the poultry business and

is responsible for all the strategic decisions of the company. The top management is very much

responsible for creating the company's culture that complements its mission, values and

principles. The below table shows the number of stocks owned by some of the board members.

The total percentage of shares held by all the insiders and the 5% of owners is 11%. (Major

holders, 2015)

Holder Shares Date ReportedJoe F. Sanderson, Jr. 757,190 19-Dec-14Lampkin Butts 88,630 3-Mar-15Michael D. Cockrell 71,264 3-Mar-15Charles W. Ritter, Jr. 44,474 12-Feb-15Fred Banks 23,287 12-Feb-15

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4. EXTERNAL ENVIRONMENT

This section will evaluate the external factors that affect and are affected by the company

such as the natural environment, societal environment and task environment in which the

company operates. The aim of the external environment scanning process is to identify the

potential opportunities and threats that might have serious impact on the company’s

performance, competitive position and existence.

4.1. Natural Physical Environment: Sustainability Issues

The natural environment of Sanderson Farms consists of its physical resources, climate

changes and disease outbreaks. Different forces from the natural environment can impact the

firm, industry, and global operations in a negative or positive way.

According to Hunger and Wheelen (2011), “Global warming means that aspects of the

natural environment, such as sea level, weather, and climate, are becoming increasingly

uncertain and difficult to predict” (p. 31). Sanderson Farms has its headquarters in the city of

Laurel, Mississippi. Most of their facilities are located in the states of Texas and Mississippi. In

the cities for Palestine & Oakwood for example, this makes sense geographically because there

is a large amount of land available in these states especially Texas that can be used for farms and

construction of plants and also the land in general is cheaper in the Southern states. Since most of

their major facilities are in Texas and few others in Mississippi & North Carolina, the natural

environment discussion will be in accordance to the South starting with the climate.

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Due to the size and the variety of geography in Texas, the climate in Texas differs from

one area to another (Texas SEGP, 2015). Two of the biggest poultry facilities Sanderson Farms

owns are located in the cities of Oakwood & Palestine, Texas and these cities are in central to

east Texas. According to Texas SEGP (2015): Most of central Texas is hill country, which has a

climate that is similar to the one in the panhandle but not as extreme. The summer tends to be hot

and winter quite cool. There are however more rivers and lakes in this area to help regulate the

temperature. In addition there are large areas of forest, which tends to inhibit the development of

thunderstorms so they are not as frequent as in the panhandle, although they do still occur. These

states are limited in the amount of harm the climate can do to the operations and facilities. The

graph below (NOAA, 2015) is a display of the average temperature in Texas, from January-

December for the last 15 years:

Weather-related events such as droughts or severe storms can alter our daily lives, and

that goes for the operations of a major organization such as Sanderson Farms. Texas’s climate is

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fairly consistent for the most part but it can have threats from weather-related events such as

tornadoes. Texas over time has developed the name of “Tornado Capital” as the average of 132

tornadoes per year hammers the state and it ranks number one in the country for tornado

occurrence (Texas Almanac, 2015). Though this sounds terrible, most of the tornadoes occur in

the Red River Valley of North Texas and the facilities of Sanderson Farms are located in Central

Texas.

The most important resource for the company is chicken feed that comprises of mainly

corn and soy. Droughts can be relevant in dry heated states such as Texas but that doesn’t have

any impact on the feed production because corn doesn’t grow in southern states and it comes

from the 'corn belt' of the country. So if there is a drought in the 'corn belt' that includes state of

Iowa, Illinois, Indiana, southern Michigan, southern Minnesota, eastern Kansas, eastern

Nebraska, western Ohio and parts of Missouri and South Dakota then that will adversely affect

the company's feed production. This will increase the cost of feed, which will bring the profit

margins down. This actually happened in 2012 and the company's suffered a loss and had to

increase its debt in order to fund its operations. Huge amount of water is needed for processing

the chicken so drought and any unavailability of water in Texas or Mississippi might still affect

the company's operations. Below is a map from (Climate Prediction Center, 2015) displaying the

United States seasonal drought outlook from February-May 2015.

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By the location of the Sanderson Farms facilities in the South Eastern part of Texas and

Mississippi, the facilities are primarily out of the major drought danger and also no drought in

the corn producing states. This brings more positive light in their strategic planned facilities and

shows that the geography of their facilities is set for long-term success.

These types of natural physical environment sustainability issues are applicable in all

regions of the world. According to Vault (2015), “Sanderson Farms produces, processes, sells,

and distributes chickens nationwide, as well as in Eastern Europe, Russia, China, Mexico, and

the Caribbean.” Since Sanderson Farms distributes around the world but manufactures from

within the U.S, the issues that happen in other parts of the world might not affect the company

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directly but it could indirectly affect its marketing and export operations. An adverse natural

calamity in the region or country where the company's products are exported could result in

either increase or decrease in demand based on the type of event.

4.2. Societal Environment

4.2.1. Economic

The current economic situation in term of feed and poultry prices is in favor of Sanderson

Farms because the feed prices are going down while the poultry prices have not changed much.

According to Mathews (2015), the broiler production is going to increase in 2015 due to

moderate feed prices and favorable economic conditions. Even though the average prices for

broiler products were declining in recent months they were still higher than the previous year.

With higher year-over-year production forecast for 2015, broiler prices are expected to continue

under some downward pressure. According to Roenigk (2015), the tight supply of beef is

benefitting the current chicken market.

Variables such as GDP (Gross Domestic Product) trends or inflation rates can alter the

economic outlook of the Sanderson Farms. According to Trading Economics (2015), “The Gross

Domestic Product (GDP) in the United States expanded at a seasonally adjusted annual rate of

2.2 percent in the fourth quarter of 2014 over the previous quarter, down from an initial estimate

of 2.6 percent.” Below is the United States GDP growth rate for the last 10 years from Trading

Economics (2015):

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Other than the recession in the economy from 2008-2010, the GDP trend has been fairly

consistent and the country is unlikely to have another recession in the near future to affect

Sanderson Farms in a negative manner.

Inflation rates have been on the decline as well from 2011 and recently, inflation fell in

January 2015 for a third straight month (US Inflation Calculator, 2015). The US Inflation

Calculator (2015) states that “US inflation turned negative for the first time since 2009 and

gasoline prices have plunged 35.4 percent over the past 12 months.” Along with gas prices,

energy prices are falling also and this all impacts the food industry. The threat of these prices

rising again is certainly there but for the time being, Sanderson Farms can take advantage of the

cheap gasoline and energy prices to run their core facilities in the South.

According to Payne (2015), the GDP forecast for 2015 is 3.3% and consumers are

energized by more job and lower oil prices which has put more money in their pockets that

caused increased consumer spending. Job growth in food services industry is phenomenal which

supports the notion that consumers are using the gas savings to treat themselves to more night

out. This will positively impact the company's production and profits.

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There are also different kinds of energy available across the country these days such as

solar power or natural gas for example. According to the Foran, Plautz, and Reis (2015), “Texas

is an energy superpower, and not just for fossil fuels. The Lone Star State produces more natural

gas than any other state, but it also leads the nation in wind energy.” There is massive potential

for solar energy in Texas because of the amount of wide-open spaces and Texas can actually be

home to 20 percent of the U.S overall potential for solar power (Foran, Plautz, & Reis, 2015).

That is a huge opportunity waiting to be tapped into and Foran, Plautz, and Reis (2015) state

“Texas is one of 29 states with a renewable-energy standard—a goal for getting a certain amount

of its power from sources like wind, solar, and other fossil-fuel alternatives.” This kind of

movement will benefit the stability of Sanderson Farms going forward as they will be able to

lower their energy costs.

4.2.2. Technological

The poultry industry is highly automated due to technological advancements that have

happened over the past few decades but the growth in technology innovation is very slow.

Technology is used in all areas of poultry processing starting from feed production to packaging

the meat. Most of the technological advancements come from university and other institutions

focused on research and some from within the industry. Different technological advancement,

whether that is through new products or machinery in their facilities, it can impact Sanderson

Farms, the competitors, and the overall food industry.

In recent years there has been additional focus on sustainable technologies that help

minimize the environmental impact and conserve natural resources. An example would be

Sanderson Farm’s water conservation efforts through their implementation of technology.

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Awarded the Industrial Groundwater Conservationist of the Year award, Sanderson Farms was

able to cut their water footprint by nearly 273 million gallons last year (Sanderson Farms, 2015).

According to Sanderson Farms (2015): Sanderson Farms has concentrated on water

conservation and the implementation of technology that would reduce its dependence on

groundwater since 2008. Between 2008 and 2013, the company witnessed a 42 percent

decrease in the amount of groundwater usage derived from the Simsboro aquifer…and

installed innovative new equipment designed to conserve water usage and incorporate

reuse wherever possible.

This type of technology improves the efficiency of their processing plants and gives

Sanderson Farms an advantage by saving money and helping the environment at the same time.

Sanderson farms have the appropriate technology in their facilities in the South to not import

poultry or process/purchase chicken from other countries. Their poultry is spread out to around

800 family owned farms and they are given individual contracts with careful selection

(Sanderson Farms, 2015). Since Sanderson Farms has total control by operating their own feed

mills and the different technology on the farms & facilities, they don’t add hormones or steroids

of any sort in their chicken production (Sanderson Farms, 2015). This allows the technology

transfer to happen from the lab (the farms in this case) to the hundreds of market places

Sanderson Farms’ products are placed.

4.2.3. Political-Legal

The political environment of Sanderson Farms, Inc. consists of stability of government,

special incentives or legal objection. According to Rapoza (2013), “Gun violence, the war on

terrorism, and political divisions in Washington make the United States rank dead last in peace

and stability compared to every rich developed nation.” The United States scores high in areas

31


such as civil liberties or adult literacy, but scores poorly in areas such as overseas conflict or

educational funding (Rapoza, 2013). In North America, Canada is labeled the “most peaceful”

country for obvious reasons and the United States is labeled the “most stressed” (Rapoza, 2013).

This stress long-term for the U.S. can hurt Sanderson Farms in regards to regulations or foreign

policies that might impact their production and distribution of chickens.

When you are a major poultry company such as Sanderson Farms, different counties can

offer incentives to build giant processing plants and create jobs in that specific area. Cumberland

County and Robeson County in the state of North Carolina are doing just that by offering

Sanderson Farms incentives. Cumberland County for example, could benefit from the flood of

jobs that would be available with the average hourly wage of $10.84 to start (Hardin, 2015).

Hardin (2015) states “The city's $3.8 million agreement would reward bonus incentives if

Sanderson Farms sought to hire minority and women-owned businesses during plant

construction and nonviolent felons.” That quote is talking about the city of Fayetteville, NC

which is located in Cumberland County. With these incentives offered, as recently as February

23, 2015, city council members voted 7-3 in favor of Sanderson Farms building the mega facility

(Chamber Jr. & Sweat, 2015).

Chamber Jr. and Sweat (2015) further explain in detail: The company was

considering whether to build a $95 million plant in a county-owned, 480-acre industrial

park in Cedar Creek, east of Interstate 95. The proposed plant would bring 1,000 jobs to

the area, and the company would contract with 80 chicken farms in a five-county area to

supply the plant, company officials said previously.

While this is good news for both sides, there is always the other end of the political

spectrum, which in this case are the local residents who object for such a plant to be build. These

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Cedar Creek residents have hired a Fayetteville lawyer to help them stop the huge Sanderson

Farms project (Barksdale, 2015). According to Barksdale (2015) “The residents this week

formed Citizens for a Clean and Safe Environment, a limited liability company to pool their

resources.” The residents of Cedar Creek are trying the environmental angle and have openly

written a letter to Sanderson Farms CEO, Joe Sanderson (Barksdale, 2015). Growing as a

company and having to build bigger plants, this rejection by local residents is one of the threats

Sanderson Farms will continue to face no matter where they build their mega-facilities.

The Energy Independence and Security Act (EISA), which includes the Renewable Fuel

Standard, RFS-1, was enacted in 2005, to mandate the use of biofuels in America's transportation

sector, such as E10 (10% ethanol/90% gasoline), E15 (15% ethanol/85%gasoline) and so on. At

present the main source of ethanol is corn kernels so this has created a constant demand for corn

from the oil companies, which has raised the feed cost for the poultry processors like Sanderson

Farms. (Post, 2013)

Immigration legislation and enforcement may affect the company's ability to hire hourly

workers. If new immigration legislation is enacted at the federal level or in states in which the

company does business, such legislation may contain provisions that could make it more difficult

or costly for the company to hire United States citizens and/or legal immigrant workers. In such

case, it might cost more to run the business or the company may have to change the way the

operation is conducted, either of which could have a material adverse effect on the business,

operating results and financial condition. Officials with the Bureau of Immigration and Customs

Enforcement have informally indicated to intent to focus their enforcement efforts on red meat

and poultry processors. (Form 10-K, 2014)

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4.2.4. Sociocultural

The sociocultural environment consists of demographic trends, lifestyle changes, and

regional shifts in population and consumer activism. The world’s population is certainly growing

as it’s gone from 3.71 billion in 1970 to 6.82 billion in 2010 to 8.72 billion expected by 2040

(Hunger & Wheelen, 2011). The demographic lump from the baby boomers in 1950s will

continue to affect market demand as this group of 77 million are in their 50s or 60s (Hunger &

Wheelen, 2011).

Above is a chart representing the percentage of the population that’s older than 55 (red

line) vs. the percentage of the population that’s prime working age (green line) (Weisenthal,

2014). Based on this data and the earlier information about the baby boomers, there is a couple

assumptions to be made: 1) There are about 77 million baby boomers out there in their old age

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currently which Sanderson Farms need to appeal to with their “natural” products. 2) Total

workforce participation is heavily relied upon from this 55 plus group and Sanderson Farms

needs to think accordingly before hiring employees.

Sanderson Farms can be hit by lifestyle changes the general public makes but in the

food/poultry industry, it’s difficult seeing them get effected in a negative way. A potential threat

Sanderson Farms could face would be if future research suggests chicken causes some sort of

cancer for example. Sanderson Farms doesn’t use hormones or steroids of any sort so that is their

way of combating such possible future research threats. Consumer activism can also be another

opportunity or threat as Financial Times (2015) describe consumer activism “The range of

activities undertaken by consumers or NGOs to make demands or state their views about certain

causes linked directly or indirectly to a company.” Sanderson Farms hopes this feedback from

the consumers is positive and not any extreme opposition, such as a boycott of a product.

4.3. Task Environment

Task environment consists of those industry factors that are external to the firm but have

a direct and specific impact upon the organization and are in turn affected by the organization’s

operations. It’s an important area of an organization, as it can have a negative impact on the

company growth and its point of success.

Sanderson Farms operates only in the poultry industry, which is a subset of a much

broader food-diversified industry. The industry has slowly moved away from fragmented to

concentrated structure with approximately forty companies involved in business of rising,

processing and marketing chickens on a vertically integrated basis. The United States is the

largest broiler chicken industry in the world and it exports over 18% or production to other

countries and this trend is to continue in the near future. The poultry industry is in the maturity

35


stage and it competes with other meat producing industries such as beef and pork. The statistics

shows that that price, production and demand for red meat has been declining steadily and at the

same time the demand, production and consumption of chicken has been rising over the decades.

While the chicken industry seems to have attained maturity in the US the global chicken industry

is still growing. The chicken industry is slowly grabbing the market share of red meat industry in

the US.

Chicken products are much like commodities and there is not a lot of differentiating factors

or scope for producing niche products. In general, the competitive factors in the U.S. poultry

industry include:

Price

Product quality

Brand identification

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Breadth of product line

Customer service.

Sanderson Farms relies on product quality for differentiating factor. Sanderson Farms

operates in the Poultry Slaughtering and Processing (using code: SIC 2015) or Poultry

Processing (under the code: NAICS 311615) industries. Although the major poultry processing

companies in the United States do not specialize in 100% natural chicken, the company still

experience challenges with its top competitors Tyson and Pilgrim’s Pride. Currently, the

company competes in the retail market that includes businesses that are selling to grocery stores

and distributors in addition to big bird deboning market that includes businesses that are selling

to companies in the food service industry (New York Times, 2015). From Seeking Alpha past

data, it was reported that the company left the small bird market in 1997, which allowed its top

competitors Tyson and Pilgrim’s to compete for guaranteed cash, but yet lower margins that

results in unpredictability of revenues (Kling, 2008). As per its organic growth strategy

Sanderson Farms press release, reported the opening of a new complex processing plant facility

in Palestine Texas. The company is the leader in the big bird deboning market and this new plant

is projected to increase the company total production capacity by 12% from 8.925 million birds

per week to 10.175 million in 2016. It will offer capacity expenditure and grow SAFM capacity,

market share and revenues (Carter, 2014).

Joe F. Sanderson Jr., chairman and chief executive officer of Sanderson Farms, Inc., said

that the construction of a similar size plant in Kinston, North Carolina has been a major

contributor to the company earnings growth. It reached full production capacity in fifteen months

with an increase of 30% of processing capacity; so this new plant is also expected to double

revenues and provide quality products for new customers and value for their shareholders. With

37


the help from the company owned, feed mills and hatcheries; SAFM is well positioned to keep

up with the growing demand of their products.

Although Sanderson Farms doesn’t sell directly its products internationally it does work

with clients / distributors who export Sanderson chicken outside the United States, reported staff

writer from Vault. He added that the Waco, Texas Sanderson plant distributes dark meat to

Mexico, while other plants distribute a small portion to Russia. Globally the consumption of

chicken is growing at 2.5 % annually, it’s not impossible to see the company taking some of its

market share in Europe or in other countries within the next decade or so (Cismeros, 2014).

Michael Porter explains the six forces model that are likely to affect an organization

profitability and market share: threat of new entry, bargaining power of buyers, threat of

substitutes products or services, bargaining power of suppliers, rivalry among competing firms,

and relative power of government.

Sanderson Farms

Threat of New Entry LOW

Bargaining Power of Buyers LOW

Threat of Substitute Products LOW

Bargaining Power of Suppliers LOW

Rivalry among Competing

firms HIGH

Relative Power of

Governments HIGH

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4.3.1. Threat of New Entrants

The industry is highly integrated and there are economies of scales with the top

companies owning the majority of the market share. Sanderson Farms is a vertically integrated

poultry manufacturer; this means that the company has its own divisions for every process from

"egg to table". The company operates in its own production facilities and hatcheries (Sanderson

Farms, 2015). This fact could be a barrier for new entry to successfully enter the market and

cause negative impact to the company. The presence of other leading poultry producers (Tyson,

and Pilgrim’s Pride) that have been in existence for a long period of time (Sanderson Farms,

founded 1947; Pilgrim’s Pride, founded 1945; Tyson, founded 1935), and are as successful will

make it extra difficult for smaller companies to easily penetrate the industry. Not to mention that

these companies have already established long relationship with their suppliers /contract growers

to raise the chickens and process, package and prepare all product lines; therefore, opportunities

and access for new companies are relatively low (Sanderson Farms, 2015).

The costs associated with this kind of business are very high due to the higher capital

investment. The facility required to stock all the chickens, the company has a specialty in

producing natural chicken, the expertise in growing and producing chicken are costly; thus new

companies will be at a higher risks to enter this business. The entry barrier is very high and so

there is very low threat from the new entrants.

4.3.2. Bargaining Power of Buyers

Buyers affect the industry through their ability to force down prices, bargain for higher

quality or more services, and play competitors against each other. It’s likely for this to happen

especially in cases where the number of sellers is high – they all sell similar products and the

39


number of buyers is low. Conversely, if bargaining power of the buyers is low, enables a firm to

pass on the increase in costs to the buyers or to make the buyers accept a lower quality of

product & service at a higher rate. (Hunger & Wheelen, 2011)

Sanderson Farms operates in a poultry industry where most of the chicken products are

priced based on weekly and daily market prices reported by the Georgia Department of

Agriculture and by private firms. This makes it impossible for the buyers to demand low prices;

they eventually continue to buy chicken within the range of the market price – which makes it

more difficult for producers to seek more competitive prices.

Also Sanderson has demonstrated great success building a strong product brand to reach

new market and customers. As a result customers have been loyal to Sanderson products and

services; which is why the power of buyers will continue to be low. One customer accounted for

more than 10% of consolidated sales for each of the years ended October 31,

2014, 2013 and 2012. Sales to that customer accounted for 15.9%, 14.2%, and 13.0% of the

company’s consolidated net sales in fiscal 2014, 2013, and 2012, respectively. In fiscal year

2013, ten customers represented 47.8% of the Company’s net sales. A sale to one of those

customers has increased steadily since 2011, from 10.6% of consolidated net sales to 14.2% of

consolidated net sales for 2013. Sales to top ten customers represented approximately 50.8% of

net sales during the 2014 fiscal year. Sanderson only maintains long-term contracts with chill

pack customers who purchased 34.4% of chicken processed by the Company in 2013. The non-

chill pack customers, with all of whom the company does not have long-term contracts, could

significantly reduce or cease their purchases with little or no advance notice. Even if the

company losses a customer it can sell the chicken to another customer at the market price

without incurring any material loss so the bargaining power of buyers is low.

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4.3.3. Threat of Substitute products or services

Substitute’s products or services are those products that appear to be different but can

satisfy the same need as another product. When consumers can easily switch to alternative

products, then this can have a negative impact on the company; as more substitutes become

available, the demand becomes more elastic since customers have more alternatives (Hunger &

Wheelen, 2011). Sanderson is well positioned in this particular area, since the consumption of

chicken in the United States continues to grow, and the prices of chicken always been relatively

low in comparison with other meats such as beef, pork or fish (Carter, 2014). As a result demand

will continue to rise, since the substitute of this products is a lot more costly. If the price of

chicken goes up due to increase in feed prices like in 2012 or the demand decreases due to

disease outbreak etc., then customers will likely switch to other healthy options like fish. In

general the consumption of meat products has been declined since the consumers' awareness

towards healthy eating habits has improved in the past decade. Consumers are looking for

alternate protein food to replace meat and this has lead to higher demands for vegetarian food

and seafood. At the current situation, there is no immediate threat of any substitute products

replacing chicken because all the meat products like beef, pork and fish are expensive compared

to chicken. Since, the demand continues to increase and chicken is considered healthier protein

meat the threat of substitutes is low.

4.3.4. Bargaining Power of Suppliers

Suppliers can affect the industry through their ability to raise prices or reduce the quality

of purchased goods and services. Companies acquire these products at a cost from the supplier,

which basically determines their profitability (Hunger & Wheelen, 2011). Suppliers have a high

41


bargaining power when there are many buyers and a few suppliers. Subsequently, the products

have a high value where companies are forced to incur cost depending on the suppliers demand.

Sanderson operates in the poultry processing industry, while the company suppliers operate in

the farming industry. Thus, the bargaining power of supplier becomes relatively low. In

industries where products are standardized, there are a high number of suppliers, especially when

it involves commodity products (Hunger & Wheelen, 2011). Sanderson would need supplies like

soybean, corn that can be used to feed animals and thus there are a numerous number of

suppliers that offer this product. In events where agriculture products fluctuate, suppliers must

conform to the market commodity price.

During fiscal 2014, the company purchased its pullets and cockerels from a single major

breeder. The company has found the genetic breeds or cross breeds supplied by this company

produces chickens most suitable to the company's purposes. The company has no written

contracts with this breeder for the supply of breeder stock. Other sources of breeder stock are

available, and the company continually evaluates these sources of supply. Should breeder stock

from its present supplier not be available for any reason, the company believes that it could

obtain adequate breeder stock from other suppliers. Other major raw materials used by the

company include feed grains and other feed ingredients, cooking ingredients and packaging

materials. The company purchases these materials from a number of vendors and believes that its

sources of supply are adequate for its present needs. The company does not anticipate any

difficulty in obtaining these materials in the future. (Form 10-K, 2014)

4.3.5. Rivalry among Competing Firms

Rivalry is the amount of direct competition in an industry. A competitive move by one

firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation

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or counterforts (Hunger & Wheelen, 2011). Sanderson products are perceived as commodities,

customer’s preferences are often determined by product quality and better service, not so much

of prices, because the industry leaders have already attained economies of scale and any price

war will be worse for the industry and also the price of chicken is decided based on the market

prices which leave very little room to have competitive pricing strategy. Most companies try to

differentiate their product or service to gain competitive position in the market. For example the

market leader Tyson Foods' strategy is to offer wide variety of meat products to the consumers

for relatively lesser prices, provide a one stop shop for all meat products, and use its economies

of scale to market and advertise to a large number of customers all over the country.

Sanderson maintains good brand awareness to its consumers and retail stores and uses

quality and customer service through its value added products as its primary competitive

advantage. Since, the market for chicken is matured new customers can be added mainly by

pulling them from the other companies. The brand image is very important in order to penetrate

the market and gain more market share. In addition, the company continues to improve a loyal

long-term relationship with its clients and distributors by offering product differentiation through

its 100% natural chicken, which place them in a favorable position; as it enables grocery stores

to offer variety of quality chicken products to their customers. In this matter rivalry among

competing firms, can be somewhat high.

4.3.6. Relative Power of Government

One of the main stakeholders in the poultry industry is the government; and the

government has the authority to limit entry into an industry through requirements and by

restricting access to raw materials and other consumer’s products (Hunger & Wheelen, 2011).

The United State government has food regulations laws to ensure the health and safety of citizen.

43


The United States Department of Agriculture (USDA), and the Federal Food and Drug

Administration to make sure that the company adheres to government regulation standards

regularly monitor the company. As stated on Sanderson website, the company go beyond what is

required by USDA standards to ensure that their customers receive the highest quality products,

and by continuing building more facilities to operate in their own clean and safer hatcheries. The

government has very tight regulations when it comes to food safety and there are numerous

guidelines that the company has to follow in order to produce and process food.

The power of foreign governments plays a major role in impacting export business. For

example last year Russia banned US chicken imports that impacted export business and also

China's decision to impose anti-dumping duties increased the cost of export and it adversely

impacted the industry.

4.3.7. Factors affecting the corporation

The most important key factor currently affecting the corporate is the market price, which

also affect the customers. Joe F. Sanderson, Jr. Chairman and Chief Executive Officer described

how the company takes great pride in the company tradition of providing quality products and

responsiveness to customer’s needs (Sanderson Farms, 2015). Although there are many

suppliers of commodities necessary for Sanderson raw materials, these ingredients can be scarce

due to weather, size of harvest. In such events, it affects Sanderson profits earnings, as products

prices fluctuate, causing the company profit margin to also decrease. There are other situations

like outbreak disease of chicken or new governmental regulations, which could adversely affect

Sanderson operations.

That being said, Sanderson must be wary of changes that could happen in consumer

preferences, causing a decline in the company profits. This could have a huge disadvantage on

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the company's product pricing, product quality, number of products that the company will be

able to offer, brand awareness and eventually the customers.

Another factor that might affect the company in the long run, as reported by Joe F.

Sanderson, Jr., relates to the increasing demand for healthy food from customers; customers

might eventually increase pressure to more federal regulations. This means that consumers will

stress for more complete information on products label to meet customer’s expectation of

organic chicken. Sanderson will need additional federal oversight, which will ultimately add both

value to the product and the company compliance expenditure (Sanderson Farms, 2015).

4.4. External Factor Analysis Summary

The following is the constructed External Factor Analysis Summary (EFAS) table for

Sanderson Farms that summarizes its opportunities and threats.

External Factors Weight RatingWeighted

ScoreWeighted Comments

OPPORTUNITIES

Demographic favor for poultry meat

0.1 5 0.5Increase risks of illness, tied with consumption of red meat, led people to eat more chicken.

Geographical opportunity to expand

0.05 4 0.2

Most of SAFM production facilities are in the south; where generally price of a land is relatively cheap compare to other locations in the country.

Numerous energy source/potential

0.05 2 0.1SAFM could lower its energy costs significantly if the plan for renewal energy standard is put into place.

GDP growth 0.05 2 0.1

Rising inflation rate leads to lower gasoline price; allowing SAFM to run their daily activities while increasing company net profits.

Technological advancement/Better efficiency

0.05 2 0.1SAFM is using innovative technologies to continue reducing the dependency of groundwater.

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USDA chicken consumption

0.1 2 0.2Consumption of chicken has increase by 2% since 2014

Increasing global demand

0.1 1 0.1High global demand of poultry, facilitate the company to operate globally

Brand Awareness 0.1 5 0.5

Sanderson continues to focus on product differentiation in relation to its competitors and its campaign on 100% natural chicken.

Suppliers raw material

0.1 3 0.3Commodity products have numerous suppliers and they must adhere to the market price

New Facility Plant Processing

0.05 3 0.15New plant is projected to increase SAFM total production capacity and increase market share.

THREATS

Environmental condition

0.05 3 0.15High prices for feed due to drought or any disease outbreak will affect profitability

Tight Regulations 0.1 4 0.4

Can adversely affect operations, which might increase costs and customers might not pay the same price they normally pay.

Poultry price going up

0.05 3 0.15If poultry price continue to increase; we might see shifts in consumers preferences.

USA international operation and political division

0.05 1 0.05Change in US foreign relations will affect global exports

Totals 1 3

Based on the table above, we can see that the demographic favor for poultry meat is

higher. That’s because the consumers continue to show favor in the consumption of chicken,

compare to other meat. This increase might be caused by the fact that people are becoming

healthier and aware of risks of certain illness associated with higher consumption of red meat,

such as diabetes, cancer etc. In addition, chicken is relatively less pricey compare to other meat,

which makes it more attractive to the low income individual in both United State and around the

world. As consumption increase Sanderson Farms profit margin also increase.

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The next important external factor from this table, relates the opportunity to expand the

export business because of the higher demands for chicken globally and US is the leading

producer and exporter of chicken. Sanderson Farms exports about 10% of its production through

independent food brokers. It is projected that the demand for chicken in the domestic market and

the global market will be steady in the coming years. Rising demand and declining feed costs,

which comprise the majority of the Company’s cost of sales, should enable Sanderson to sell

many products at a high margin. Another external factor with a high weighted score relates to

brand awareness. As Joe F. Sanderson Jr., chairman and chief executive officer of Sanderson

Farms Inc Sanderson reported, how much of the competition related to poultry industry ties with

the ability to maintain a cherished long term relationship with customers, contract grocery stores

and supermarket chains. This way the company is able to build a name for itself and find a

valuable shelf space in retail stores.

The last external factor is based on government regulations. Although the company takes

precautions to ensure that its chicken are healthy, and that its processing facilities are well clean

and healthy maintained, a small error might jeopardize the company well-being. Stricter laws

could potentially harm Sanderson Farm if the company becomes incapable of conforming to

these laws and regulations. Not only the company might face charges for failure to comply with

the law, but could also be force to close the business or the company might be force to make a

product re-call; which can tremendously hurt the profitability of the company.

Final weighted score of the external factors surrounding Sanderson Farms is 3.00, which

means that the company is doing at the average level to these specific factors in light of the

perceived importance.

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5. INTERNAL ENVIRONMENT

This section will analyze the internal factors that affect the company's strategies such as

the corporate structure, culture and resources. The corporate resources section will examine

various departments of the company including marketing, finance, research and development,

operations, human resource management and information technology. This aim of the section is

to help identify the strengths and weakness of the company.

5.1. Corporate Structure

The corporate structure of Sanderson Farms is a hybrid structure, which is a mix of both

division based and function based.

There are three divisions under the corporate umbrella. The company conducts its chicken

operations through Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc.

(Processing Division), both of which are wholly owned subsidiaries of Sanderson Farms, Inc.

The Production Division, which has facilities in Laurel, Collins, Hazlehurst and McComb,

Mississippi; Bryan, Waco, Palestine, Freestone County, and Robertson County, Texas; Adel,

Georgia and Kinston, North Carolina, is engaged in the production of chickens to the broiler

stage.

The Processing Division, which has facilities in Laurel, Collins, Hazlehurst and McComb,

Mississippi; Hammond, Louisiana; Bryan, Palestine, and Waco, Texas; Moultrie, Georgia and

Kinston, North Carolina, is engaged in the processing, sale and distribution of chickens. It

conducts its prepared chicken business through its wholly owned subsidiary, Sanderson Farms,

Inc. (Foods Division), which has a facility in Flowood, Mississippi. The Foods Division is

engaged in the processing, marketing and distribution of approximately 130 prepared chicken

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items, which it sells nationally and regionally, principally to distributors and national food

service accounts.

There are various departments for that carry out various business functions like sales,

administration, technical services, development and communications. These functional

departments run across divisions and are headed by respective Director of the departments.

Director of Production heads the production division and the Director of Processing heads the

processing division.

Even though there is three different divisions the decision making authority lies with the

executive committee in terms of strategy and objectives while the respective division heads

handles the decisions about day-to-day operations autonomously.

5.2. Corporate culture

The culture in Sanderson Farms is highly focused on hard work and growth of

employees, which is clearly evident from the amount of training that each employee goes

through before being assigned any work. The culture revolves around honesty, customer service,

work ethic and integrity. There are intense orientation sessions that focus on the values and

principles of the company. There is more emphasize on family values and heritage and through

individual employee focus every employee feels valued and are committed to the shared vision

of the company. The hard work is rewarded by stock incentives and bonuses. Every plant runs

leadership development programs that are focused on training the employees to be future leaders

and one of the vision for the company is to create a leadership culture and fill the pipeline with

highly capable and skilled employees so every leadership level has abundant leaders. In addition

to this, quality is taken seriously at every stage of the company's operation starting from the

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selection of breeder farms that produce pullets and cockerels that matches the company's

objectives to final packaging. The quality check is done at every stage of production and

processing and not just limited to quality control team. Customer service is one of the

differentiating factors that the company has a great pride because it is embedded in company

culture. One of the criteria that the company looks for while hiring new employees is how well

the applicants' values and philosophy are in line with the firm's philosophy. This is a major factor

why the cultural intensity is very strong in the company.

The company runs a corporate responsibility program, which is focused on reducing the

environmental impact and cost efficiency goals. The objective of the program is to engage all of

Sanderson Farms’ employees to build sustainability thinking and practices into their everyday

work and to enable continued freedom to innovate in a responsible way. It has established

complex responsibility teams in all of its divisions to implement various initiatives. The

corporate responsibility council that comprises of all the heads of the departments provides

overall direction for setting and management of corporate wide projects and activities. Through

its various initiatives several environmental improvement actions have been successfully

implemented like capturing methane gas at the processing plants and recycling it, using biogas,

reducing amount of wax used in the shipping containers, redesign shipping cartons to reduce

usage of corrugated materials, reducing the size and gauge of plastic bags, wastewater water

treatment etc., As a result of these actions, the company was able to reduce the usage of water,

electricity and gas (Corporate responsibility report, 2012). Since, the company has a hierarchical

control structure where the top management has overall control of the corporation and it grows

organically there is strong cultural integrity.

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5.3. Corporate resources

This section will analyze various internal factors of the company in detail including

marketing, information technology, operations, human resources and research and development.

5.3.1. Marketing

The below graph summarizes the fundamental five Ps of Sanderson Farm's marketing

strategy.

The firm’s chicken products are sold primarily to retailers (including national and

regional supermarket chains and local supermarkets) and distributors located principally in the

southeastern, southwestern, northeastern and western United States. The firm also sells its

chicken products to casual dining operators and to United States based customers who resell the

products outside of the continental United States. This wide range of customers, together with

Placesouth, southeast,

southwest, northeast/retail, big

bird deboning

PriceMarket price,

negotiated with customers

PromotionI believe,

Giving back, commercials, qualtiy, values

Positioning100% natural

chicken, superior customer service,

value added products

ProfitHigher margin

market(big bird)

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the firm’s product mix, provides the firm with flexibility in responding to changing market

conditions in its effort to maximize profits. Sales and distribution of the firm’s chicken products

are conducted primarily by sales personnel at the firm’s general corporate offices in Laurel,

Mississippi, by customer service representatives at each of its processing complexes and one

prepared chicken plant and through independent food brokers. Each complex has individual on-

site distribution centers and uses the firm’s truck fleet, as well as contract carriers, for

distribution of its products.

Generally, the firm prices much of its chicken products based upon weekly and daily

market prices reported by the Georgia Department of Agriculture and by private firms.

Consistent with the industry, the firm’s profitability is impacted by such market prices, which

may fluctuate substantially and exhibit cyclical and seasonal characteristics. The firm will adjust

base prices depending upon value added, volume, product mix and other factors. While base

prices may change weekly and daily, the firm’s adjustments are generally negotiated from time

to time with the firm’s customers. The firm’s sales are generally made on an as-ordered basis,

and the firm maintains some long-term sales contracts with its customers.

From time to time, the firm may use television, radio and newspaper advertising, point of

purchase material and other marketing techniques to develop consumer awareness of and brand

recognition for its products. The firm has achieved a high level of public awareness and

acceptance of its products in its core markets. Brand awareness is an important element of the

firm’s marketing philosophy, and it intends to continue brand name merchandising of its

products. During calendar 2004, the Company launched an advertising campaign designed to

distinguish the Company’s fresh chicken products from competitors’ products. The campaign

noted that the Company’s product is a natural product free from salt, water and other additives

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that some competitors inject into their fresh chicken. The Company continues to use various

media to communicate this message today (Form 10-K, 2014). The company also runs I believe

campaign to interact with customers. It has special promotional ads during the holiday season

like Christmas, Thanksgiving etc., and other special days like July 4th.

As part of its giving back to the community program and marketing strategy the firm

sponsors the golf tournament Sanderson Farms Championship, which is an annual stop on the

PGA tour and the proceeds are donated to the Friends of Children's hospital. It uses co-op

marketing strategy with some retail customer too. Their current marketing strategy is to be closer

to the customer locations so that they can respond to customer needs in a more efficient way and

that is why the firm has planned to build $121 million poultry processing plant, feed mill and

hatchery to serve the established customers base on the east coast. It also has success in tapping

new markets where it didn't have any customer base through because of its ability to market its

products as 100% natural.

According to the CEO, the focus will be in the big bird deboning market. Even though he

believes that the sales could double from the processing plants the value-added (prepared)

products from these plants have not been profitable. The return from these products was only in

single digits when the return from big bird deboning is in double digits.

Sanderson Farms offers a wide range of all-natural chicken products. The Company’s

products include ice pack, chill pack, bulk pack, and frozen chicken, in whole, cut-up, and

boneless form. All of Sanderson Farms’ products are inspected by its’ own Quality Assurance

Team, as well as the USDA to ensure its’ products meet the highest standards. Sanderson Farms

also uses co-op advertising programs to develop specific promotional packages to tailor its

products to customers. Some of the Company’s most popular retail cuts include whole birds,

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drumsticks, thighs and boneless and skinless chickens. The Company recently released a new

“Premium Hand-Trimmed” line of chicken to add more variety to the products it offers, showing

the dedication the Company has to providing options for its customers.

The following table sets forth, for the periods indicated, the contribution, as a percentage

of net sales dollars, of each of the company's major product lines.

Fiscal Year Ended October 31,

2010 2011 2012 2013 2014

Company processed chicken:

Value added:

Chill pack 28.5% 32.5% 33.1% 34.4% 36.0%

Fresh bulk pack 54.5 48.5 49.0 50.5 48.3

Frozen 9.8 12.4 13.1 10.5 9.2

Subtotal 92.8 93.4 95.2 95.4 93.5

Non-value added:

Ice pack 0.8 1.2 1.2 1.0 0.9

Subtotal 0.8 1.2 1.2 1.0 0.9

Total Company processed chicken 93.6 94.6 96.4 96.4 94.4

Prepared chicken 6.4 5.4 3.6 3.6 5.6

Total 100.0% 100.0% 100.0% 100.0% 100.0%

The poultry processor's growth is tied to its control over production capacity coupled

with close oversight of all operations related to the manufacture of its chicken products. While

many chicken processors also serve the small bird markets (comprising primarily fast-food

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purveyors), Sanderson Farms targets the retail and big bird deboning markets, which service the

grocery and foodservice sectors. Therefore, the average weight of Sanderson's birds is more than

that of other companies' and its total production in pounds is greater, as well.

5.3.2. Finance

Sanderson Farms has been financially very successful and has outperformed industry and

competition in various parameters over the past several years and has persevered through the

avian influenza outbreak in 2006, the economic downturn of 2008, overproduction in 2011 and

drought and high feed costs in 2012. (WATT Poultry USA, April 2014)

Net sales for fiscal 2014 were $2,774.8 million as compared to $2,683.0 million for

fiscal 2013, an increase of $91.9 million or 3.4%. Net sales of poultry products for

fiscal 2014 and fiscal 2013 were $2,620.5 million and $2,586.0 million million, respectively, an

increase of $34.5 million or 1.3%. The increase in net sales of poultry products resulted from

a 0.9% increase in the average sales price of poultry products sold and a 0.5% increase in the

pounds of poultry products sold. During fiscal 2014 the company sold 3,045.5 million pounds of

poultry products, up from 3,031.1 million pounds during fiscal 2013. The additional pounds of

poultry products sold resulted from slightly higher bird weights, offset by a 0.2% decrease in the

number of chickens sold. Overall, market prices for poultry products increased during

fiscal 2014 as compared to fiscal 2013. Urner Barry average market prices increased for boneless

breast meat and tenders during fiscal 2014 compared to fiscal 2013 by 3.7% and 14.9%,

respectively, while average market prices for jumbo wings and bulk leg quarters decreased by

19.9% and 9.6%, respectively, for the same period. The price for Georgia Dock whole birds,

which reached its historical high during the company’s fourth fiscal quarter of 2014, averaged

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5.7% higher during fiscal 2014 as compared to the average during fiscal 2013. Net sales of

prepared chicken products during fiscal 2014 and 2013 were $154.3 million and $97.0 million,

respectively, or an increase of 59.1%, resulting from a 55.7% increase in the pounds of prepared

chicken products sold and a 2.2% increase in the average sales price of prepared chicken

products sold. During fiscal 2014, the Company sold 76.1 million pounds of prepared chicken

products, up from 48.9 million pounds sold during fiscal 2013.

Cost of sales for fiscal 2014 was $2,253.9 million as compared to $2,377.1 million during

fiscal 2013, a decrease of $123.2 million, or 5.2%. Cost of sales of poultry products sold during

fiscal 2014 and fiscal 2013 were $2,106.6 million and $2,285.4 million, respectively, a

decrease of $178.8 million, or approximately 7.8%. As illustrated in the table below,

the decrease in the cost of sales of poultry products sold resulted primarily from a decrease in the

cost of feed per pound of broilers processed of $0.0732 or 18.0%, partially offset by an

increase in the pounds of poultry products sold of 0.5%.

The Company’s operating income during fiscal 2014 was $381.9 million as compared to

an operating income during fiscal 2013 of $205.7 million. The improvement in the Company’s

operating margin resulted primarily from lower costs of feed grains and improved market prices

of poultry products during fiscal 2014 as compared to fiscal 2013, as described above. The

Company’s net income during fiscal 2014 was $249.0 million, or $10.80 per share, as compared

to net income during fiscal 2013 of $130.6 million or $5.68 per share. (Form 10-K, 2014)

The below graphs shows the performance in terms of revenue net income, profit margin,

operating income and operating margin compared to the past five years.

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The below graph on the left shows the operating, financing and investing cash flow trend

and the graph on the right shows the balance sheet picture for the past five years. Except for the

year 2011 where the cost of goods increased due to increase in corn and soy prices, which

pushed the company to fund the operations by taking more debt all the other years show

increasing cash flow from operating activities and decrease in debt and increase in assets.

FINANCIAL STRENGTH Company Industry Sector

Quick Ratio (MRQ) 2.27 1.41 0.66

Current Ratio (MRQ) 3.73 1.85 1.18

LT Debt to Equity (MRQ) 1.04 44.68 10.68

Total Debt to Equity (MRQ) 2.08 80.47 30.3

Interest Coverage (TTM) 50.05 5.33 581.79

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The above table shows that the company's liquidity ratios are higher than the industry and

even sector average. As per its strategy of maintaining a clean balance sheet the company's debt

to equity ratio is very low which shows that its balance sheet is very strong with less debt

burden, which gives the organization freedom to expand with minimal impact on the financial

situation. The company is not highly leveraged for example capital expenditures of

fiscal 2014 were funded by cash on hand at November 1, 2013, and cash provided by operations

during fiscal 2014.

PROFITABILITY RATIOS Company Industry Sector

Operating Margin (TTM) 15.39 11.09 18.08

Net Profit Margin (TTM) 10.03 7.49 13.23

The operating margin is higher than the industry average by almost 4% and also its net

profit margin is higher than the industry average. The company is highly profitable which is

partly due to its focus on the big bird deboning market and 100% natural products that have

higher margins compared to small bird market which is the least profitable of all the poultry

markets.

EFFICIENCY Company Industry Sector

Inventory Turnover (TTM) 10.72 6.6 6.49

Asset Turnover (TTM) 2.74 1 2.08

The efficiency measures like inventory turnover and asset turnover ratios are also better

than the industry average. The company is able to achieve higher turnover ratios due to its

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operations efficiency and its strategy to build its plants based on its own design and

specifications.

The profitability ratios that measure the effectiveness of the management like the return

on investment, return on equity and return on assets are also better than the industry averages.

MANAGEMENT EFFECTIVENESS Company Industry Sector

Return on Assets (TTM) 27.45 7.55 29.17

Return on Investment (TTM) 31.38 11.93 64.01

Return on Equity (TTM) 33.82 15.68 72.38

The list of ratios for the past five years that are based on the DuPont analysis are listed in

the below table. The company has improved in almost all the metrics over the years and has

performed well. The company is improving its financial situation every year and also beating the

industry averages at the same time.

59


The company has outperformed its competitors in profitability and shareholder value.

5.3.3. Research and Development

Based on the available information Sanderson Farms is not focused on research and

development. It doesn’t have a separate department or unit that does pure research. It doesn't

spend a single dime on research and development because it believes that a competitive

advantage based on patents and research cannot be sustained for a long time and it also increases

its SG&A expenses which is not good for the financial strategy.

5.3.4. Operations

Sanderson Farms is a fully vertically integrated organization, which gives high degree of

control to all of its supply chain activities starting from production of hatching eggs to

processing and distributing the final products. By building new plants and complexes instead of

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acquiring them the company is able to design and build plants as per its own specifications that is

more efficient for its operations. It also helps the company to implement modern environmental

policies and create an environment that is good for its employees. Many of the plants run even up

to three shifts to keep the production to full capacity.

Sanderson Farms has a list of 50 points of interest in its site selection criteria. Potential

plant sites are evaluated and scored based on data gathered touching on key items like the area’s

contract grower base, sustainable, rail service and environmental concerns. Since the company

manufactures its own feeds through its feed mills, the quality of incoming raw materials is tested.

Drawing from best practices and lessons learned during previous feed mill constructions,

Sanderson Farms have a strong handle on what works best within its feed manufacturing

division. This is exemplified by the company’s standardization of machinery in all of its feed

mills for training and consistency purposes. Its feed mill in Kingston is fully automated starting

from unloading the ingredients, grinding to specification, mixing, mashing, pelleting and cooling

to loading on to the trucks for delivery.

The firm has contracts with more than 800 independent growers. The production and

processing plants are strategically situated near the farms so that it helps the firm to monitor the

farms more closely and support them in a faster and efficient manner.

5.3.5. Information Technology

Sanderson Farms is equipped with modern softwares and technology that helps the firm

to fully automate its operations. The software Beta Raven is used to control all plant operations

from the control room. This helps the staff to watch every segment and every area of the mill. It

uses MTech systems to monitor and schedule feed distribution automatically. Combined with the

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fully automated load out system powered by Beta Raven, the firm monitors the load required for

each house rather than each farm and schedules the next delivery based on the amount of feed

needed and the time it takes to refill the feed.

5.3.6. Human Resource Management

Sanderson Farms believe that it takes a team of successful people from diverse

disciplines to bring the products to customers' table. From law and science to accounting and

computer programming, Sanderson Farms employs people from a wide range of backgrounds

and skill sets, all working together to meet customer needs and produce chicken that’s always

100% natural.

There is lot of emphasis on training the employees. There are training programs for every

position offered in the company. Every employee undergoes an extensive training program for

24 months. The aim of the training is to get hands-on experience, understand how the firm

operates, observe different management style and learn about the company's values and culture.

All the employees are given basic training in all the areas of the business in addition to the

specific job for which they are hired. One of the requirements to apply for the any job is that the

applicants have to identify themselves with the company's vision, mission, values and

philosophy. This shows how much the company emphasizes on its values and the fit of employee

with its culture. There are special training programs for each of the job function like, audit and

accounting trainee program, sales, trainee program, personnel trainee program, maintenance

trainee program, risk management trainee program, communication trainee program etc., There

are five advanced trainee programs for employees with management experience based on their

years of experience. The company also hires students for a paid internship programs. It conducts

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two days road shows for college students where they interact with the management and go on a

tour of the facilities to get a closer look at the company.

All new salaried employees gather each quarter for Performance Review and Salaried

Orientation. This program is designed to help employees understand the Performance Review

System, which is a tool used to provide feedback on the employees’ level of performance, help

them improve their level of performance, and to reward them equitably for their performance.

During the daylong program, the participants also hear about the history of Sanderson Farms, the

Company Culture, our Guiding Principles, our benefits as employees of Sanderson Farms, and

the policies of the company

Quarterly Leadership Initiative for Effectiveness meetings are held to engage the full

leadership team in conversation about factors contributing to the success of Sanderson Farms and

factors that could make Sanderson Farms even more successful. Once those areas are identified,

operational goals are developed to help the company achieve improved performance. Every

Monday, the Executive Committee looks at the deficiencies and discusses where the company

needs to improve performance and what the company can do to make it better. Leading with

Vision is another program that focuses on collective ambition. The company's collective

ambition is to maximize shareholder value. Through lectures, group discussions, experiential

learning activities and video presentations the employees learn leadership effectiveness skills.

It offers a comprehensive benefits package that includes a very good insurance package

that includes health, disability, dental, life and vision and retirement package. According to the

employees the company offers extremely good salary and benefits including employee stock

ownership plan. Many of its employees have been with the company for a long-term and retire

after 45 or 47 years of tenure.

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5.3.6.1. Labor Union Relations

As of October 31, 2014, the company had 11,461 employees, including 1,471 salaried

and 9,990 hourly employees. A collective bargaining agreement with the United Food and

Commercial Workers International Union covering 474 hourly employees who work at the

company’s processing plant in Hammond, Louisiana expires on November 30, 2016. This

collective bargaining agreement has a grievance procedure and no strike-no lockout clauses that

should assist in maintaining stable labor relations at the Hammond plant.

The production, maintenance and cleanup employees at the Company’s Bryan, Texas

poultry processing facility are represented by the United Food and Commercial Workers Union

Local #408, AFL-CIO. A collective bargaining agreement covering 1,248 employees expires on

December 31, 2014, and negotiations are ongoing to extend this agreement. The collective

bargaining agreement has a grievance procedure and no strike-no lockout clause that should

assist in maintaining stable labor relations at the Bryan, Texas processing facility. (Form 10-K,

2014)

5.3.6.2. Legal Proceedings

Two of the former employees filed a complaint on February 16, 2012, alleging violations

of the federal and State of Georgia’s Racketeer Influenced and Corrupt Organizations (“RICO”)

Acts against the company and seven of the current and former employees in the United States

District Court for the Middle District of Georgia. The plaintiffs contend in their complaint that

the company conspired to knowingly hire undocumented immigrants at the Moultrie plant to

“save Sanderson millions of dollars in labor costs because illegal aliens will work for extremely

low wages”. The action was brought as a class action lawsuit on behalf of all legally authorized

64


hourly employees who worked at the Moultrie plant in the four years before the filing of the

case. The plaintiffs sued for money damages, injunctive relief and revocation of the license to

conduct business in the State of Georgia.

In 2012, workers at the Hazlehurst, Mississippi plant protested for horrible working

conditions, and officials with the Laborers International Union of North America Local 693 held

a press conference to highlight the poor working conditions. The 700 workers at the plant have to

do their jobs in 100-degree-plus temperatures with minimal breaks, poor air-conditioning, and

unsanitary bathrooms, Local 693 representatives said. They showed large photographs showing

worker injuries as a result of the high production demands at the plant. Union representatives

said the plant processes 200,000 chickens every day, and worker injuries are common. (Atkins,

2012)

5.4. Internal Factor Analysis Summary

Sanderson Farms' has several core competencies that include skilled employee base and

its leadership focused employee training programs and the employee and quality centric

corporate culture. The brand image of the corporation as an environment friendly socially

responsible corporate citizen is a great strength. Its 100% natural chicken products is a major

differentiating factor. Its corporate responsibility programs that focus on minimizing

environmental impact and at the same time lower the cost and increase the efficiency of

production and processing operations using less resources is one of its strength which has

improved its brand image as a trustworthy organization.

The company is able to achieve high quality 100% natural chicken products with

minimum cost due to its economies of scale and running the plants at full capacity and also by

65


controlling the feed production. By producing its own feed, the company is able to provide the

chickens with the quality feed with right nutrition that it wants to provide and it also reduces the

cost involved in purchasing and dependency on the suppliers. Since the company doesn't use any

artificially added hormones, seaweed, sodium or broth to the chicken or in the feed it is able to

produce 100% natural chicken products. The financial position of the company is stable with

increasing net profit, revenue and stock price. The company's financial ratios are better than the

industry average. It is the third largest poultry processing company in the country with a

capitalization of over 2B.

The weaknesses are its not much diversified product portfolio and the absence of any

research and development focus. Even though the innovation rate is slow in the poultry industry

and it mainly come from outside the industry the competitors like Tyson Foods focus on product

and process innovation, which helps them to advance and gain more market share. There is a risk

of not investing in research when other companies are. Also, the company is not operating in

prepared food market and small bird market, which is needed to sustain the growth. Since, the

poultry market is almost matured, one way to increase the market share is by catering to as many

customers as possible and pull customers away from the competition. To do this the company

has to offer more product lines that will cater to other market segments as well.

The below Internal Factor Analysis Summary (IFAS) table summarizes the company's

strengths and weaknesses.

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Internal Factors Weight RatingWeighted Score

Comments

STRENGTHSEconomies of scale 0.2 4 0.8 Third largest companySkilled employees 0.05 3 0.15 Leadership cultureFinancial stability 0.2 5 1 Clean balance sheetTrack record of growth 0.1 3 0.3 Stock pricesSustainability practices 0.05 2 0.1 Efficient use of resourcesWEAKNESSESLawsuit 0.05 1 0.05 Labor union issuesNo research and development

0.1 1 0.1Long term sustainability without innovation is difficult

Limited product diversity

0.2 3 0.6 To gain competitive advantage

Poor Working conditions

0.05 3 0.15 Employee complaints

Total 1 3.25

6. ANALYSIS OF STRATEGIC FACTORS (SWOT)

6.1. Situational Analysis

The major strengths of the organizations is its financial performance due to its clean

balance sheet which helps in expansion of the business and increases shareholder value and also

its control over the supply chain because of economies of scale which is the key success factor in

the poultry industry which is concentrated. The company's financial stability has helped it to

sustain economic crisis, drought and disease outbreak. It was able to rebound quickly from losses

and is able to regain the market position. By controlling the supply chain it is able to run the

production at full capacity, which helps to minimize per unit costs which is very important

because the profit margins in the poultry industry is very less due to high competition and also

the prices are determined by the commodity market.

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The weakness of the company is in its limited product portfolio and absence of research

and development. The company operates in a larger meat/protein/food industry, which is highly

competitive. It is able to differentiate its products only based on the quality and marketing

strategy to position it as 100% natural chicken. This is not a distinctive competency and its

competitors can replicate it easily. The company's brand image can be damaged even if there is a

very small incident of contamination or other food safety related litigations. In the absence of

other competitive factors such as product depth the company is at risk. The other weakness is

there is no focus on innovation. The industry is matured and all the companies possess almost

same technology and processes depending up on the affordability and preference. Innovating

new technology, processes and products is a vital factor in order to be in the top of the industry

and that will give an edge over the competitors.

Increasing consumer preference for chicken to red meat has increased the demand for

chicken and aided increased production year over year. The production and demand for beef and

pork is reducing continuously because it is considered unhealthy compared to chicken. So many

people are switching to chicken. Also the consumers' preference has changed from unprocessed

meat to processed meat like cut, boneless, skinless chill pack meat. There is growing demand for

prepared chicken that is ready to eat. At present the company is not interested in this prepared

food market because the profit margin is less but it is necessary to understand the customer

preferences and use the opportunity to grow in this market segment. Also the demand for chicken

is growing in the global market. The company is exporting already to some countries through

broker food service companies. Expanding the export operations will be necessary to offset any

decline in domestic sales.

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The major threat for the poultry industry is the climate conditions including global warming.

Since it cannot be avoided totally it is necessary to shield from natural disasters in the future. The

government regulations are another threat that might adversely affect the company’s operations.

The most important internal and external factors that affect the company's present and

future performance are listed in the below Strategic Factor Analysis Summary (SFAS) table.

Strategic FactorsWeight

Rating

Weighted Score

DurationComments

ShortIntermediate

Long

Financial stability (S)

0.2 5 1 XClean balance sheet

Economies of scale (S)

0.1 4 0.4 XCompetitive position

Demographic favor for poultry meat (O)

0.2 4 0.8 XConsumer awareness

Increasing global demand (O)

0.1 2 0.2 XExport to developing countries

Limited product diversity (W)

0.1 3 0.3 XNarrow market segment

No research and development (W)

0.15 1 0.15 XNeed innovation to grow

Tight regulations (T) 0.05 4 0.2 XIncreases operating costs

Environmental conditions (T)

0.1 2 0.2 X Uncertainty

Total 1 3.25

6.2. Review of Strategic Posture

The company's mission, vision, values and objectives are aligned with its operations,

culture and strategy. It is able to maximize the stakeholder value by maintaining a stable

financial position. As per its values the company has an excellent reputation for a responsible

corporate citizen for its social responsibility activities and community involvement through

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charity. The brand image of the company is 100% natural chicken, which is the core value of the

business. The employees are empowered and are its pillars because of its excellent leadership

trainings. The objective to be in the top 10% of the industry is well achieved and the company

might be able to sustain it by carefully choosing its market segments and product portfolio. It

might not be possible to sustain its position if it doesn’t try to aim for more market share because

of the intense competition in the industry.

The strategy needs to be changed so that the weaknesses of being not able to cater to all

market segments can be rectified using its current strengths and take advantage of the

opportunities which will help to minimize the threats. The objective should be to be the leader of

the industry. The market differentiation has to be based on the breadth of the products offered in

addition to the quality chicken and superior customer service. The values and mission are very

relevant to the company at present and also for the future strategic changes.

The issue faced by the company is its lack of breadth in its product line and lack of

innovation due to its objective of being in the top 10% of the industry that has been already

achieved and is not challenging anymore.

7. STRATEIC ALTERNATIVES AND RECOMMENDED STRATEGIES

This chapter will analyze the important strategic factors as identified in the previous

section and derive various strategies that will address various issues facing the organization both

external and internal using the competencies. All the strategies will be analyzed in detail and

based on the feasibility and the organizational fit of these strategies one or more alternatives will

be recommended for implementation.

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7.1. Strategic Alternatives

The below TOWS matrix is used to compare the organization's internal strength and

weakness factors against the external opportunities and threats to derive specific strategic

alternatives that exploit the opportunities and avoid the threats either by taking advantage of the

strengths or by overcoming weaknesses.

TOWS MATRIX

STRENGTHS (S) WEAKNESSES (W) Financial stability Limited product diversity

Economies of scale No research and development

Sustainability practices

OPPORTUNITIES (O)SO STRATEGIES WO STRATEGIES

(Horizontal Integration & Marketing Strategy)

(Related Diversification)

Demographic favor for chicken meat

Expand geographically

Expand product portfolio to take advantage of demographic favor for chicken and other poultry products.

Increasing global demand

Increase marketing efforts Increase brand awareness by diversifying into related product markets.

Brand Awareness

THREATS (T)ST STRATEGIES WT STRATEGIES

(Operations & Financial Strategy)

(Related Diversification & R&D Strategy)

Tight regulations Implement improved environment sustainability practices.

Diversify to counter increasing chicken prices.

Natural environmental conditions

Use financial stability to minimize the impact of adverse natural conditions.

Innovate to deal with threats.

Poultry price going up

7.1.1. SO Strategies

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SO strategies intent to take advantage of the organization's strengths and exploit the

available external opportunities which will give benefit the organization in the long term either

by increasing the market share or reducing the costs.

7.1.1.1. Expand geographically. (Horizontal Integration)

Meat production is projected to double by 2020 due to increased per capita global

consumption of meat and population growth. According to a new multi-species study by

international meat consultants Gira, total demand for meat is set to grow by 40m tones over the

next 10 years – equivalent to a 14% expansion. About a third of this will be in China – the new

economic powerhouse – and around 60%, or 24m tones, will be for poultry meat, mainly

chicken. This domination by poultry reflects the fact that it is the cheapest form of animal

protein.

Most of this increase in production will come through industrialized animal production

systems. This industrialized animal production and worldwide broiler meat exports are

dominated by two low-cost producing countries, the United States and Brazil, broiler producers

in some importing countries are not price competitive with major exporters. The cost of

producing a broiler differs from country to country, depending on the price of feed, labor, birds,

technology, and production facilities as well as the ability of producers to achieve economies of

scale. For broiler production, feed is the largest single production cost. (Harlen, D., 2011).

Sanderson Farms can take advantage of it. One reason that the United States and is major

producers and exporters is their position as large feed grain producers, which allows their broiler

industries access to feed at prices and quantities unavailable to many producers in importing

countries. Another advantage Sanderson firm has large processing facility with advance

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technology. That will help gaining further economies of scale on scope in processing and

marketing. The economies of scale will give the organization its price advantage over most

competitors in the broiler industry. This will also help to meet the growing global demand by

expanding its export operations to developing countries either directly or through intermediaries.

The company can also expand in the other part of the country where its presence is less like north

and northeast compared to south, southeast and southwest.

7.1.1.2. Increase marketing efforts. (Marketing strategy)

Successful business management knows that generating lucrative sales goes beyond

having a product to sell. The success of a business also relies on how effective the business is in

creating greater visibility and awareness for business brand, products or services with targeted

customers. Since, the organization is financially strong it can have huge marketing budgets and

go for the traditional route and spend more on advertising on radio, TV and print collaterals. In a

rapidly evolving digital age, the organization can get the same or even better visibility and

exposure through digital marketing channels – foremost of which is social media – at the fraction

of the cost traditional media requires.

Since the chicken is a commodity and quality differentiation is one of the primary ways

to gain competitive advantage in the market Sanderson Farm’s main marketing strategy is built

around its brand image as 100% natural chicken producer. There is a growing awareness among

the consumers about healthy eating habits and there is growing demand for healthy food options.

Since, Sanderson Farms’ is right on track to meet this demand because of its 100% natural high

quality chicken the organization can take advantage of its position to gain market share. To

achieve this it has to market aggressively to maximum number of customers possible not only in

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the regions where it operates but through out the country. Marketing campaigns has to target the

health conscious consumers and also its food service customers.

7.1.2. WO Strategies

WO strategies aim to overcome the internal weaknesses of the organization by exploiting

the opportunities.

7.1.2.1. Expand product portfolio to take advantage of demographic favor for chicken and other poultry products. (Related Diversification)

Berry (2015) described the current situation the poultry industry is in as “Both changing

demographics and increasing disposable income contributes to increased meat and poultry

consumption.” Sanderson Farms has built most of their major processing plants in the Southern

part of the United States, in states such as Texas or North Carolina. Sanderson Farms’ chicken is

available throughout the country and internationally, but has a major emphasis in the South.

While positioning themselves in the South, Sanderson Farms deals with a certain

population, which are African Americans and this can be used as a strength. According to the

U.S. Census Bureau (2011), “The 10 states with the largest black alone-or-in-combination

populations in 2010 were New York (3.3 million), Florida (3.2 million), Texas (3.2 million),

Georgia (3.1 million), California (2.7 million), North Carolina (2.2 million), Illinois (2.0

million), Maryland (1.8 million), Virginia (1.7 million) and Ohio (1.5 million).” This shows that

majority of the African American population resides in the South and this leads into the habit

African Americans love spending money on. Gedeon (2015) explained that “…when it comes to

unprepared meat, seafood and poultry, Blacks account for nearly 18 percent of the industry’s

dollar volume.” Those are substantial numbers Sanderson Farms can take advantage and

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eventually increase their product diversity to populations such as African Americans that are

already established.

There is also growing demand for chicken meat in general across the country and

globally. Consumers are looking for more value added products that will make their job easy so

Sanderson Farms can increase its value added product profile by adding more prepared or

cooked chicken products. It can enter into small bird market and sell to fast food restaurants and

frozen cooked chicken products to retailers. This will increase the product breadth and market

share and help reach more consumers.

7.1.2.2. Increase brand awareness by diversifying into related product markets. (Related Diversification)

Sanderson Farms is a top three poultry producer in the United States and needs to take

advantage of its brand & power to implement future products. They need to understand the

concept of brand awareness & loyalty and use the love of their current product line to produce a

more diversified portfolio. Gasca (2014) stated “Big brands dominate. They have established

market share and typically huge marketing and advertising budgets to defend it. They also have

experience, talent and profound reach. It is enough of a competitive barrier to entry to scare away

any ambitious startup.” Sanderson Farms is definitely a big brand in chicken and it can use its

name to experiment with other products such as turkey or eggs.

This organization has the ability and control over their production A to Z to produce

chickens at a highly efficient rate so by replicating the operational efficiency and the available

knowledge about the poultry processing the organization can diversify into eggs or turkey. A

recent example is in North Carolina Sanderson Farms has revealed it is to invest $139 million in

a new poultry processing plant, and waste water treatment facility, with the capacity to process

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1.25m birds per week (Gyton, 2015). Their investment in state-of-the-art complexes pays high

dividend for them and can be used for other products. By diversifying into new markets the

organization can also increase the brand awareness by acquiring new customers.

7.1.3. ST Strategies

ST strategies take advantage of the strengths like economies of scale, financial stability

and efficient sustainability practices to minimize the impact of threats facing the organization.

7.1.3.1. Implement improved environment sustainability practices. (Operational Strategy)

Sanderson Farms has an extraordinary capability to use fewer resources in producing and

processing its organic chicken and also has implemented environment sustainability measures in

most of its plants that has helped the organization to save a lot of money in the previous years by

conserving water, gas and power. Government regulations regarding food safety and

environmental protection policies are biggest threat to the poultry industry. When new

regulations are introduced the organization might have to change its operating procedures, spend

considerable amount of money in process improvement, introducing new technologies and

machineries to support the changes etc., in order to comply with the regulations. This will

increase the cost of production and processing for the organization.

Sanderson Farms can minimize these threats by using its strength of effectively

implementing sustainability processes in its plants and its economies scale to minimize the losses

that could be incurred due to the above-mentioned changes due to new regulations. This strength

can be used to achieve a judicious balance for the uncertainty, such as tight governmental

regulations; to prevent certain regulations interrupt its business operations. Therefore, the

organization needs to consider/pay close attention to governmental regulations and include them

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in their business strategies. The organization needs to have a clear understanding of key factors

that can cause new governmental regulations, which will also to help assess the likelihood of

affecting the organization. It will serve as a tool to help examine the value at stake; allowing the

organization to determine whether it has financial capabilities to sustain such change.

7.1.3.2. Use financial stability to minimize the impact of adverse natural conditions. (Financial strategy)

Sanderson Farms has proven its strong capability to maintain a clean balance sheet, thus

it can use this strength to prepare for changes in environmental conditions that can affect the

daily activities of the organization as well as its profitability. The large unpredictability of corn

and soy are subject to change due to environmental conditions, thus the organization can use its

financial resources to continue the marketing of its products, in case these unforeseeable events

occur and can take losses for a short period of time and still bounce back as it did in the year

2012. So it is important for the organization to maintain its strong financial situation with lower

debt.

7.1.4. WT Strategies

WT strategies try to overcome the weaknesses like limited product diversity by

minimizing the threats like raising chicken prices and environment and regulatory factors.

7.1.4.1. Diversify to counter increasing chicken prices. (Related Diversification)

One of the weaknesses of the organization is its narrow product portfolio that consists

only of chicken and its narrow target market that is big-bird deboning market. When the chicken

prices go up the organization’s sales drops and hence the revenues decline since its financial

performance is fully dependent on chicken products. It doesn’t have any other product that could

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generate revenues to minimize the loss created by declining chicken sales. Most of its

competitors offer large number of products to its customers that give them some cushion during

difficult times. To maintain a constant growth rate and minimize the volatility in revenues it is

necessary to have a well-diversified product portfolio, which will give a competitive advantage

too.

7.1.4.2. Innovate to deal with threats. (R&D Strategy)

Some of the environmental threats like weather and climate changes are not in the control

of the organization and the organization cannot mitigate it but the impact of threats like disease

outbreaks and increase of corn prices due to weather can be minimized by using innovative

technologies and processes that will also give the organization some competitive advantage over

the competitors. Already the major competitors like Tyson Foods and Pilgrim's Pride are heavily

involved in a lot of research and development activities to create new products and processes that

benefits the organization in gaining higher market share and be a leader in the industry.

Sanderson Farms can do research on alternate feed sources that are abundantly available and are

not negatively impacted by changing weather conditions in order to reduce the dependency on

corn feed. It can also do research on breeding hybrid disease resistant chickens. The organization

is already doing some sustainability practices that have saved a lot of money for the organization

by conserving gas, water and power. This is another area where the organization can focus on

doing more process improvement research and implement more cost saving measures. This will

not only help to save cost but also to address the increasing regulatory requirements. The

organization can take open innovation approach and form alliances with government and

academic labs to drive innovation.

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7.2. Other Strategies

7.2.1. No-Change strategy

The organization faces no major immediate threat or has weakness that will affect the

organization’s position or operations in the short-term future. So, the organization can adopt a

no-change strategy and continuously monitor the competition. Some of the competitors who are

in the top ten list of the industry have shown relatively increased growth rate compared to

Sanderson Farms in the last year so it is necessary to be aware of this fact and evaluate the

current strategies from time to time and depending on the changes in the external environment

formulate new strategies.

7.2.2. Strengths-Weaknesses (SW) Strategy (Related Diversification)

SW strategy aims to overcome the weaknesses by taking advantage of the strengths.

Sanderson Farms needs to take advantage of their strengths, which are their geographic

positioning of the production & distribution of their products, the demographics in which

Sanderson farms operates, and the brand loyalty they have acquired over the years to grow the

business at a faster phase by getting into the new market segments by increasing its product

offering. This is a related diversification strategy.

7.3. Current strategies

Sanderson Farms currently pursues two business strategies namely organic growth and

vertical integration, one marketing strategy that is differentiation and one financial strategy that

is clean balance sheet. These strategies are discussed below.

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7.3.1. Organic Growth and Vertical Integration

Currently the Sanderson Farms is pursuing a growth strategy that is fully organic. This is

the only organization has built the last six plants in the country while all the other players in the

industry grow by acquisition or merger. This has helped the organization in controlling its

operations in an efficient way by designing and building the plant according to the specifications

that suits its needs best. It has also helped the company to maintain its conservative culture,

which is closely controlled by the top management. It has also worked well to implement Total

Quality Management (TQM) objectives. It has recently built a new plant in Palestine, Texas,

which has started operations in the first half of 2015 and it is expected to run at full capacity by

the end of 2015. It opened another plant in North Carolina in 2013. Sanderson Farms is already a

fully integrated company like most other companies in the industry and that is one of its

strengths.

7.3.2. Differentiation

Sanderson Farms’ key success factor is its ability to differentiate its product as a superior

quality product compared to its competitors and its customer focused approach, which is also

inline with its vision. While many of its competitors claim that their chicken is “All natural” in

reality they are not “100% natural” as Sanderson Farms which has given the organization an

edge over others. Sanderson Farms’ chicken is perceived as healthy option to others and this has

helped to gain customers’ trust and good will and a very strong brand image.

7.3.3. Clean Balance Sheet

The company's financial stability is its major strength that has helped it to bounce back

from losses due to economic crisis in the past. It has outperformed its competitors and the

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industry in most of the financial metrics like profitability ratios, efficiency ratios and liquidity

ratio. The current financial strategy is to have clean balance sheet that is having minimal debt.

The company's debt ratio is the best in the industry. This has given the company the freedom to

do what is does best that is to build plants and grow organically.

7.4. Recommended Strategies

This section will recommend strategies that are considered feasible for implementation

and the rational behind recommending those strategies. Recommended strategies fall under two

categories. First category is short-term strategies that are formulated based on the current

strategies in progress and the current environmental factors and can be implemented immediately

or within a year. Second category of strategies is the long-term strategies that are based on the

expected future changes in the environmental factors and the long-term interests of the

organization that are to be planned and implemented after one or two years from now. These

strategies have to be evaluated on a continuous basis and adjusted according to the

environmental conditions that prevail at the time of evaluation.

7.4.1. Short–Term Strategy: No-Change

The current strategies are working to the benefit of the company at the present. It is one

of the leaders in the industry with operational efficiency and excellent growth rate and a niche as

a superior chicken producer and created a successful brand image. There is not immediate threat

from the competitors or natural physical environmental conditions that will impact the company

in any negative way. The demand for chicken products is growing which will increase its sales

and boost revenues. Also the company has just opened two major plants and invested a huge

capital in them in the last two years and one of the plants will be fully operational only after few

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months. So, there is no need to change the direction of the company for some time until the

capital expenses are at least partially recovered and the latest plant attains full capacity.

At the same time it is necessary to keep the current operational strategy of corporate

sustainability programs going which will help to decrease costs by using minimum resources and

increase operational efficiency that will in turn help in cost saving. Also, this is needed to meet

the regulatory threats. One of the reasons for recommending no-change strategy as a temporary

strategy is to align with the current financial strategy of having a strong balance sheet by

recovering some of the capital expenses and making sure that financial stability is achieved

before making any change in direction. So, the current functional strategies can be continued till

the long-term direction change strategy is implemented.

7.4.2. Long–Term Strategy: Related Diversification/Marketing strategy

Related diversification strategy is recommended for long-term because it has multiple

advantages. The company can overcome its weakness of having limited product profile

compared to other companies in the industry which limits its growth potential, meet the threat of

raising chicken prices and increase brand awareness to a great extent by reaching to different

customers or by offering different products to meet different needs of the same customer.

The chicken industry is matured in US even though the demand for chicken meat is

growing because of changing consumer preferences. The increase in demand is due to the shift in

consumer choice of protein consumption from red meat to poultry since the later is considered

healthier meat than the former. This shift is also due to decline in chicken prices over the past

decades as a result of increased production and economies of scale. The rate of growth has since

declined due to heavy competition and commodification of chicken.

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Sanderson Farms has a strong competitive position in chicken market and it has

distinctive competency, which is producing 100% natural chicken due to its quality control at

every stage of the value chain starting from selecting right source for the feed to packaging

coupled with flexible customer service. Using its strengths the company can diversify into other

poultry markets namely egg and turkey markets. These markets are perfect strategic fit for the

company where it can apply its manufacturing capabilities, marketing and distribution. The

synergy between these products with chicken will be high. Turkey and chicken production,

processing, distribution channels, customer usage, managerial skills needed are all same because

of the similarities between the products. The only difference is in breeding process. Similarly egg

and chicken also share common distribution channels and customers.

By adopting related diversification the company has a safe bet, where it can utilize the

existing resources and skills to its benefit. Moreover since the demand for eggs is inelastic this

will give a help to maintain a steady cash flow even though the margins are low. It will minimize

the huge volatility in revenues when the prices of chicken fluctuate. As the demand for poultry in

general is high the demand for turkey is also high but not as high as chicken. This strategy could

be used as the first step in learning about diversification since this will be the major strategy

change since the time of foundation of the company. Successful implementation of this strategy

could lead to unrelated diversification in the future, which will reduce the risk to a greater level.

Marketing strategy is recommended because it will complement the diversification

strategy. Since the company has exceptional brand image in south and southwestern parts of the

country it could use "brand extension" to market its new products (eggs and turkey) to the

existing markets. It could also market its chicken products along with its new products to other

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geographical markets within the country. It could use "pull strategy" and advertise mainly to

retail consumers, in order to increase the consumer demand for its products.

Since, the company's expertise is in chicken processing it doesn’t possess skills necessary

to produce and sell the new products. Even though there are some commonalities between these

products it will be impossible for the company to rely on organic growth for diversification as

well. So the company has to grow by acquisition. To achieve diversification the company for the

first time will acquire other much smaller companies that are in the process of producing and

selling eggs and turkeys. Diversification fits the organization's mission of being a superior

quality producer in the food industry. The potential acquiree's corporate culture will be studied

before acquisition so that there is a cultural match between the two companies.

8. IMPLEMENTATION, EVALUATION AND CONTROL

This chapter deals with implementation, evaluation and control of the recommended

strategies, which in this case is related diversification. It is a follow-up of strategic formulation.

The success of a good strategy is dependent on how good it is implemented and executed.

8.1. Implementation

This section will cover the all activities involved in implementing a strategy. Since, it is

not possible for the audit team to have access to all internal information it is not possible to fully

develop implementation programs and policies. The programs and action plans discussed in this

section are based on the limited resources available to the team at the time of writing the audit

report.

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"Strategic implementation is the sum total of the activities and choices required for the

execution of a strategic plan" (Hunger & Wheelen, 2011). The strategies are put into action by

creating appropriate programs, plans, procedures, processes, budgets etc., in the implementation

phase. This process happens in parallel to strategy formulation. In order to successfully

implement a strategy the following three questions has to be addressed first.

1. Who implements strategy?

2. What must be done?

3. How is strategy to be implemented?

The following paragraphs will try to answer these fundamental questions, which will

guide Sanderson Farms in implementing the related diversification strategy.

8.1.1. Who implements strategy?

The executive board and the various committees in the company will formulate the

strategy. Since the board members are active they will also play a major role in formulation.

Then once it is approved the implementation will be carried out by vast majority of the

employees starting from the division heads, functional managers and all employees. A new

committee can be formed specially to implement the integration process. Since the strategy

involves a great integration effort every employee of the organization has to buy in the new

strategy. Integration has to happen smoothly at each and every level in order for the

implementation to be successful. In this regard every employee implement the strategy. The top

management has to be very clear in communicating the new strategy to everyone especially the

operations managers whose units will have major impact due to integration. Employees from

both the companies will implement the strategy.

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8.1.2. What must be done?

The top management and the acquisition committee along with middle managers come up

with programs, budgets and procedures needed for implementation. In this case the team will

comprise of managers from both the companies. The programs and procedures must be created

for integrating the companies under one corporate umbrella. The programs must focus on

bridging cultural divide mainly because mismatched corporate culture between the companies is

the major reason for failed integration strategies. Programs should be created for cross training

and knowledge sharing. The action plans should have step by step process of acquisition process

and what activities has to be done in each step. Each action plan should have a back plan incase

of unexpected incidents.

Individual budget plans have to be developed for each program, which will provide the

overall cost structure of the implementation plan in real dollar terms. This will confirm the

feasibility of the plan. Synergy can be created using the shared tangible resource, economies of

scale, and coordinated strategies.

8.1.3. How is strategy to be implemented?

This section deals with organizing the corporation, staffing the programs and directing

the activities towards achieving the objectives for implementing the actions successfully.

Acquiring a company leads to change in the corporate structure because structure should

follow the strategy. The existing structure is stage three; divisional structure and by acquiring a

new business unit the resulted structure of the organization will be of stage four; matrix structure.

The concentric diversification strategy is the popular strategy that is used when the organization

is in the maturity stage and the appropriate structure that will be created will be decentralized

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structure with cross-functional teams. In the matrix structure the company will have product

units will act as divisions and are differentiated based on product-market basis. The functional

departments or support units like marketing, sales, production, processing, technology and

administration will be permanent and spread across various departments. The employees will

now have the opportunity to work within various divisions and business units thus having high

job rotation and job enlargement. Employees from both the companies can be trained in each

other's jobs and take different responsibilities which will increase variety and also they can

perform more of same tasks for example sales employees will have more products to sell.

Sanderson Farms' strength is its employee orientation and the intensive training

programs. Such training programs can be improved in scope for implementing the strategy so all

the employees go through the training to learn about each other's culture and job. This will

reduce the gap in culture. The company could hire an analytical portfolio manager in order to

implement the diversification strategy. The redundant jobs can be eliminated and common

performance appraisal systems should be used to evaluate performance of the employees. New

HR policies has to be developed that will reward people who have experience in both the

businesses and are willing to learn and share. Cross-business unit teams could be formed to

minimize the communication problems.

The strategy is not in line with the conservative culture so the culture needs to be changed

because culture follows strategy. The culture can be changed by introducing structural changes,

new HR policies, trainings, reward structures and hiring compatible employees. The acquiree's

culture will be assessed before deciding if integration is the right choice or other methods of

managing two different cultures are appropriate. Since, the acquiree will be a much smaller

company it will be easy for assimilation or integration of cultures.

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8.2. Evaluation and Control

It is important to establish methods and guidelines to evaluate the performance of the

implementation programs and activities based on the expected and actual results. These control

mechanisms should be established well before the company starts implementation. Since

financial measures will be available only at the year end it is necessary to establish other

measures to evaluate performance called steering controls like production units running at full

capacity, increase in sales, addition of new customers, customer satisfaction surveys, cost

reduction targets, real time controls for quality, etc. Behavior controls can be established to

specify how things have to be done through guidelines, policies, rules and standard operating

procedures. Output controls will specify what should be the result look like and input controls

will focus on the resources needed to perform an activity.

The important method to evaluate the performance of the corporate performance is to

compare the financial metrics before and after implementation of the strategy. These measures

include return on investment, earnings per share, return on equity and operating cash flows.

Shareholder value is another important measure to evaluate the corporate performance. The

corporate financial metrics can be measured against benchmark competitors. If the actual

performance is not as expected then take corrective actions and evaluate again and repeat the

process until the desired performance levels are met.

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9. REFERENCES

(2011). 2010 Census shows Black population has highest concentration in the South. United

States Census Bureau. Retrieved from

https://www.census.gov/newsroom/releases/archives/2010_census/cb11-cn185.html

(2015). Climate in Texas. Texas SEGP. Retrieved from http://www.texassegp.org/climate-in-

texas.php

(2015). Current U.S. inflations rates: 2005-2015. U.S. Inflation Calculator. Retrieved from

http://www.usinflationcalculator.com/inflation/current-inflation-rates/

(2015). Definition of consumer activism. Financial Times. Retrieved from

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10.APPENDICES

10.1. Appendix A: DuPont Trees

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10.2. Appendix B: Consolidated statement of cash flows

Sanderson Farms, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended October 31,

2014 2013 2012

(In thousands)

Operating activities

Net income$ 249,048 $ 130,617 $ 53,944

AAdjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization64,309 62,225 59,979

Amortization of unearned compensation12,396 8,111 4,781

Live inventory adjustment — — (9,000)

Provision for losses on accounts receivable— 415 412

Deferred income taxes(9,867) (16) 7,995

Change in assets and liabilities:

Accounts receivable (9,316) (11,373) (4,413)

Inventories 15,032 30,057 (15,159)

Income taxes10,434 4,467 84,045

Prepaid expenses and other assets(3,026) (2,546) 354

Accounts payable(32,718) (1,337) 15,994

Accrued expenses and claims payable10,175 32,244 6,987

Total adjustments57,419 122,247 151,975

Net cash provided by operating activities306,467 252,864 205,919

Investing activities

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Capital expenditures (171,626) (54,529) (49,249)

Net proceeds from sale of property and equipment514 169 39

Net cash used in investing activities (171,112) (54,360) (49,210)

Financing activities

Borrowings from revolving line of credit— 15,000 45,000

Payments on revolving line of credit — (125,000) (157,701)

Principal payments on long-term debt (10,000) (10,000) (10,000)

Principal payments on capital lease obligations (10,213) (756) (1,106)

Payments for debt issuance costs — (2,783) (625)

Dividends paid (30,453) (16,339) (15,621)

Tax benefit from stock incentive plans1,016 145 706

Proceeds from issuance of restricted stock under stock compensation plans 901 827 758

Payments from issuance of common stock under stock compensation plans (6,559) (1,837) (1,393)

Net cash used in financing activities (55,308) (140,743) (139,982)

Net change in cash and cash equivalents80,047 57,761 16,727

Cash and cash equivalents at beginning of year85,563 27,802 11,075

Cash and cash equivalents at end of year$ 165,610 $ 85,563 $ 27,802

Supplemental disclosure of cash flow information:

Income taxes paid (refunded) net $ 130,023 $ 54,969 $ (60,142)

Interest paid$ 3,548 $ 6,489 $ 9,433

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